Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated
filer þ

Accelerated
filer o

Non-accelerated
filer o
(Do not check if a
smaller reporting company)

Smaller reporting
company o

Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ

On February 17, 2009, 74,224,990 shares of NeuStar
Class A common stock were outstanding and 4,538 shares
of NeuStar Class B common stock were outstanding. The
aggregate market value of the NeuStar common equity held by
non-affiliates as of June 30, 2008 was approximately
$1.69 billion.

DOCUMENTS INCORPORATED BY REFERENCE:

Information required by Part III (Items 10, 11, 12, 13
and 14) is incorporated by reference to portions of
NeuStars definitive proxy statement for its 2009 Annual
Meeting of Stockholders, which NeuStar intends to file with the
Securities and Exchange Commission within 120 days of
December 31, 2008.

We provide essential clearinghouse services to the
communications industry and enterprise customers. Our customers
use the databases we contractually maintain in our clearinghouse
to obtain data required to successfully route telephone calls in
North America, to exchange information with other communications
service providers and to manage technological changes in their
own networks. We operate the authoritative directories that
manage virtually all telephone area codes and numbers, and we
enable the dynamic routing of calls among thousands of competing
communications service providers, or CSPs, in the United States
and Canada. All CSPs that offer telecommunications services to
the public at large, or telecommunications service providers,
such as Verizon Communications Inc., Sprint Nextel Corporation,
and AT&T Corp., must access our clearinghouse to properly
route virtually all of their customers calls. We provide
clearinghouse services to emerging CSPs, including Internet
service providers, mobile network operators, cable television
operators, and voice over Internet protocol, or VoIP, service
providers. In addition, we provide domain name services,
including internal and external managed DNS solutions that play
a key role in directing and managing traffic on the Internet,
and we manage the authoritative directories for the .us and .biz
Internet domains. We operate the authoritative directory for
U.S. Common Short Codes, part of the short messaging
service relied upon by the U.S. wireless industry, and
provide solutions used by mobile network operators worldwide to
enable mobile instant messaging for their end users.

We were founded to meet the technical and operational challenges
of the communications industry when the U.S. government
mandated local number portability in 1996. While we remain the
provider of the authoritative solution that the communications
industry relies upon to meet this mandate, we have developed a
broad range of innovative services to meet an expanded range of
customer needs. We provide critical technology services that
solve the addressing, interoperability and infrastructure needs
of the communications industry and enterprise customers. These
services are used to manage a range of technical and operating
requirements, including:



Addressing. We enable CSPs and enterprises to
use critical, shared addressing resources, such as telephone
numbers, Internet top-level domain names, and U.S. Common
Short Codes.



Interoperability. We enable CSPs to exchange
and share critical operating data so that communications
originating on one providers network can be delivered and
received on the network of another CSP. We also facilitate order
management and work flow processing among CSPs.



Infrastructure. We enable CSPs to more
efficiently manage their networks by centrally managing certain
critical data they use to route communications over their
networks.

Company
Information and History

We were incorporated in Delaware in 1998 to acquire our business
from Lockheed Martin Corporation. This acquisition was completed
in November 1999. Our principal executive offices are located at
46000 Center Oak Plaza, Sterling, Virginia, 20166, and our
telephone number at that address is
(571) 434-5400.

On June 28, 2005, we effected a recapitalization, which
involved (i) payment of all accrued and unpaid dividends on
all of the then-outstanding shares of preferred stock, followed
by the conversion of all such shares into shares of common
stock, (ii) the amendment of our certificate of
incorporation to provide for Class A common stock and
Class B common stock, and (iii) the split of each
share of common stock into 1.4 shares and the
reclassification of the common stock into shares of Class B
common stock. We refer to these transactions collectively as the
Recapitalization. Each share of Class B common stock is
convertible at the option of the holder into one share of
Class A common stock, and we anticipate that all holders of
Class B common stock will ultimately convert their shares
into shares of Class A common stock.

Changes in the structure of the communications industry over the
past two decades have presented increasingly complex technical
and operating challenges. Whereas the Bell Operating System once
dominated the U.S. telecommunications industry, there are
now thousands of service providers, all with disparate networks.
Today these service providers must interconnect their networks
and carry each others traffic to route phone calls, unlike
in the past when a small number of incumbent wireline carriers
used established, bilateral relationships. In addition, CSPs and
enterprises are delivering a broad set of new services using a
diverse array of technologies. These services, which include
voice, data and video, are used in combinations that are far
more complex than the historical, uniform voice services of
traditional carriers.

The increasing complexity of the communications industry has
produced operational challenges, as the in-house network
management and back office systems of traditional carriers were
not designed to capture all of the information necessary for
provisioning, authorizing, routing and billing these new
services. In particular, it has become significantly more
difficult for service providers to:



Locate end-users. Identify the appropriate
destination for a given communication among multiple networks
and unique addresses, such as wireline and wireless phone
numbers as well as Internet Protocol, or IP, and
e-mail
addresses;



Establish identity. Authenticate that the
users of the communications networks are who they represent
themselves to be and that they are authorized to use the
services being provided;



Connect. Route the communication across
disparate networks;



Provide services. Authorize and account for
the exchange of communications traffic across multiple
networks; and

Enterprises in the United States and throughout the world have
become increasingly reliant on the Internet and other DNS-based
systems to support their businesses. With the growth in
e-commerce
and the emergence of advanced DNS-based communication services,
large and small enterprises have increased demand for:



secure and reliable email and networks;



authoritative directories for Internet domain names; and



domain name registration services.

Our
Clearinghouse

We provide our services from a set of unique databases, systems
and platforms in geographically dispersed data centers, which we
refer to collectively as our clearinghouse. Our clearinghouse
has been designed to provide substantial advantages in meeting
the challenges facing the communications industry and
enterprises for both traditional voice and IP networks. First,
our clearinghouse databases and capabilities provide competing
CSPs and enterprises with fair, equal and secure access to
essential shared resources such as telephone numbers and domain
names. This sharing of data is critical for locating end-users
and establishing their identity. Second, our clearinghouse
databases and capabilities serve as an authoritative directory
to ensure proper routing of voice, advanced data applications
and IP-based
communications, such as mobile instant messaging, regardless of
originating or terminating technologies. Third, our customers
may access our clearinghouse through standard interfaces. Our
clearinghouse also enables connections to authoritative
operating data for our customers, including CSPs, content
providers and enterprises. As a result, our clearinghouse
facilitates advanced services, such as multi-media content
services and mobile instant messaging. Finally, our services
facilitate the management of networks and services, including
the deployment of new technologies and protocols, the balancing
of communications traffic across our customers internal
networks, network consolidation, and the control of instant
messaging services, which promote our customers ability to
create differentiated and value-added services.

To ensure our role as a provider of essential services to the
communications industry and our enterprise customers, we
designed our clearinghouse to be:



Reliable. Our clearinghouse services depend on
complex technology that is designed to deliver reliability
consistent with industry standards and the standards of our
customers. Under our contracts, we have committed to our
customers to deliver high quality services across numerous
measured and audited service levels, such as system
availability, response times for help desk inquiries and billing
accuracy, consistent with these standards.



Scalable. The modular design of our
clearinghouse enables capacity expansion without service
interruption or quality of service degradation, and with
incremental investment that provides significant economies of
scale.



Neutral. We provide our services in a
competitively neutral way to ensure that no one
telecommunications service provider, telecommunications industry
segment or technology or group of telecommunications customers
is favored over any other. Moreover, we have committed not to be
a telecommunications service provider in competition with our
customers.



Trusted. The data we collect are important and
proprietary. Accordingly, we have appropriate procedures and
systems to protect the privacy and security of customer data,
restrict access to the system and generally protect the
integrity of our clearinghouse. Our performance with respect to
neutrality, privacy and security is independently audited
regularly.

NeuStar
Clearinghouse Services

Addressing

Addresses are a shared resource among CSPs and, in
certain circumstances, enterprises. Each communications device
must have a unique address so that communications can be routed
properly to that device. With the development of new
technologies, the number and type of addressing resources
increase, and the advent of bundled services, such as voice plus
text messaging, may require that multiple addresses be
identified for what is intended to be a single, integrated
communication to one or more devices used by a single user or a
group of users.

For communications to reliably reach the intended users, we
believe that the communications industry and enterprises require
a trusted, authoritative administrator of addressing directories
to route communications. Moreover, we believe that CSPs must
have fair access to shared addressing resources and must be able
to access the administrators systems to ensure the proper
routing of communications. We provide a range of addressing
services to meet these needs, including:



Telephone Number Administration. As the North
American Numbering Plan Administrator, we maintain the
authoritative database of telephone numbering resources for
North America. We allocate telephone numbers by geographic
location and assign telephone numbers to telecommunications
service providers. We administer area codes, including area code
splits and overlays, and collect and forecast telephone number
utilization rates by service providers. As the National Pooling
Administrator, we also manage the administration of inventory
and allocation of pooled blocks of unassigned telephone numbers
by reassigning 1,000-number blocks of assigned but unused
telephone numbers to telecommunications service providers
requiring additional telephone numbers. We provide these
services under fixed-fee contracts with the Federal
Communications Commission, or FCC.



Telephone Number Pooling. In addition to the
administrative functions associated with our role as the
National Pooling Administrator, we also implement the
administration of the allocation of pooled blocks of unassigned
telephone numbers through our clearinghouse, including the
reallocation of pooled blocks of telephone numbers to the
consolidated network of consolidating carriers following a
merger or other business combination. We were paid on a per
transaction basis for this service through December 31,
2008. As of January 1, 2009, we will be paid on an annual,
fixed-fee basis for addressing, interoperability and
infrastructure transactions.

Ultra Services. We provide a suite of services
that play a key role in directing and managing Internet traffic,
and monitoring, testing and measuring the performance of
websites and networks, all of which enable thousands of
customers to intelligently and securely control and distribute
Internet traffic, and ensuring security, scalability and
reliability of websites, email and networks. We are typically
paid a recurring monthly fee based on contractually established
monthly transaction volumes. If the transactions processed
exceed the maximum of the transaction volumes that were
contractually established, we are paid a per transaction fee for
these excess transactions.



Domain Registry Services. We operate the
authoritative registries of Internet domain names for the .biz
and .us top level domains. In addition, we are the technical
back-end registry operator for the .travel and .tel top-level
domains. All Internet communications routing to any of these
domains must query a copy of our directory to ensure that the
communication is routed to the appropriate destination. We are
the exclusive provider of wholesale registration services to
domain name retailers for all regions outside of the home
countries for the .cn, or the country code top-level domain for
China, and .tw, or the country code top-level domain for Taiwan.
We are primarily paid on a subscription basis for each name in
the registries.



U.S. Common Short Codes. We operate the
authoritative U.S. Common Short Code registry on behalf of
the leading wireless providers in the United States. A Common
Short Code is a string of five or six numbers, which serves as
the address for text messages that are sent from
wireless devices to businesses or organizations on a many-to-one
basis. U.S. Common Short Codes are often used by consumer
brand companies and organizations to count votes using wireless
devices in promotional marketing efforts, such as votes for
sporting event MVPs, to register for contests and special
offers, to download applications such as ring tones, and are
used for product awareness campaigns. We are paid on a
subscription basis for each code in the registry.

Interoperability

To provide communications across multiple networks involving
multiple service providers, industry participants must exchange
essential operating data. We believe that our clearinghouse is
the most efficient, logistically practical and economical means
for each CSP to exchange the large volumes of operating data
that are required to deliver communications services between
networks. Our services include:



Wireline and Wireless Number Portability. Our
clearinghouse is the master, authoritative directory that allows
end users in the United States and Canada to change their
telephone carrier without changing their telephone numbers. In
addition, service providers use this service to change the
network identification associated with their end users
telephone numbers after a merger or consolidation. We have
provided this service for wireline local number portability
since 1997, and in 2003, we expanded our service to provide
portability of telephone numbers between wireless
telecommunications service providers and between wireline and
wireless telecommunications service providers. In the United
States, we were paid on a per transaction basis for this service
through December 31, 2008. As of January 1, 2009, we
will be paid on an annual, fixed-fee basis for addressing,
interoperability and infrastructure transactions. In Canada, we
are paid on a per transaction basis for this service.



Order Management Services. We provide
centralized clearinghouse services that permit our customers,
through a single interface, to exchange essential operating data
with multiple CSPs in order to provision services. We are
typically paid on a per transaction basis for each order we
process.

Infrastructure
and Other

Constant changes in the communications service industry require
providers to make frequent and extensive changes in their own
network infrastructure. Our infrastructure services are used by
CSPs to efficiently reconfigure their networks and systems in
response to changes in the market. Our services include:



Network Management. Our customers in the
United States and Canada use our clearinghouse to centrally
process changes to essential network elements that are used to
route telephone calls. In the United States, we

were paid on a per transaction basis for this service through
December 31, 2008. As of January 1, 2009, we will be
paid on an annual, fixed-fee basis for addressing,
interoperability and infrastructure transactions. In Canada, we
are paid on a per-transaction basis for these services. Our
network management services are used by our customers for a
variety of different purposes, such as to replace and upgrade
technologies, to balance network traffic and to reroute traffic
on alternative networks in the event of a service disruption.



Connection Services. We provide standard
connections for those CSPs that connect directly to our
clearinghouse. We are paid an established fee based on the type
of connection.

NeuStar
Next Generation Messaging Services

Mobile Instant Messaging. We provide scalable
solutions to mobile network operators worldwide, which allow
them to manage instant messaging, or IM, services provided by
Internet service providers and to create their own branded IM
services. We are typically paid a monthly fee on a per-active
user basis.

Operations

Sales
Force and Marketing

As of December 31, 2008, our sales and marketing
organization consisted of approximately 290 people who work
together to deliver advanced technologies and solutions to serve
our customers needs. Our sales teams work closely with our
customers to identify and address their needs, while our
marketing team works closely with our sales teams to deliver
comprehensive services, and develop a clear and consistent
corporate image.

We have an experienced sales and marketing staff who offer
extensive knowledge in the management of telephone numbers and
domain name systems, number portability and IP clearinghouse
services. We believe we have close relations with our customers,
and we know their systems and operations. We have worked closely
with our customers to develop solutions such as national
pooling, U.S. Common Short Codes, number translation
services, and the provisioning of service requests for VoIP
providers. Our sales teams strive to increase the services
purchased by existing customers and to expand the range of
services we provide to our customers.

Customer
Support

We strive to provide world-class customer service, and we
provide customer support 24 hours a day, 7 days a week
and 365 days a year. Customer support personnel are
responsible for the end-to-end ownership of all customer
inquiries, provisioning and trouble requests. Our staff works
closely with our customers to ensure that our service level
agreements are being met. They continually solicit customer
feedback and are in charge of bringing together the proper
internal resources to troubleshoot any problems or issues that
customers may have. Performance of these individuals is measured
by customer satisfaction surveys and through stringent
measurements of key performance indicators.

Operational
Capabilities

We operate our services through our state-of-the-art data
centers and remotely hosted computer hardware that is currently
located in third-party facilities throughout the world. Our data
centers, including third-party facilities that we use, are
custom designed for the processing and transmission of high
volumes of transaction-related, time-sensitive data in a highly
secure environment. We are committed to employing best-of-breed
tools and equipment for application development, infrastructure
management, operations management, and information security. In
general, we subscribe to the highest level of service and
responsiveness available from each third party vendor that we
use. Further, to protect the integrity of our systems, the major
components of our networks are generally designed to eliminate
any single point of failure.

We have consistently met and frequently exceeded our contractual
service level requirements and, for some of our services, our
performance results are monitored internally and subjected to
independent audits on a regular basis.

We maintain a research and development group, the principle
functions of which are to develop new services and improvements
to existing services, oversee quality control processes and
perform application testing. Our processes surrounding the
development of new services and improvement to existing services
focus on the challenges communicated to us by our customers
related to the management of an expanding array of technologies
and end-user services across a growing number of CSPs and
enterprises. We employ industry experts in areas of technology
that we believe are key to solving these problems. Our quality
control and application testing processes focus predominantly on
highly technical issues related to the performance of our
technology platforms, which are identified through both internal
and external feedback mechanisms, and continuous testing of our
applications and system platforms to ensure uptime commensurate
to service level standards we have committed to our customers.
As of December 31, 2008, we had approximately
164 employees dedicated to research and development, which
consists of software engineers, project managers and
documentation specialists. We expense our research and
development costs as incurred. Our research and development
expense was $17.6 million, $27.4 million and
$27.5 million for the years ended December 31, 2006,
2007 and 2008, respectively.

Customers

We serve traditional providers of communications, including
local exchange carriers, such as Verizon Communications Inc. and
AT&T, Inc.; competitive local exchange carriers, such as XO
Holdings, Inc. and Level 3 Communications, Inc.; wireless
service providers, such as Verizon Wireless Inc., and long
distance carriers. We also serve emerging CSPs, including
Comcast Corporation, Cox Communications, Inc. and Cbeyond, Inc.,
and emerging providers of VoIP services, such as Vonage Holdings
Corp.

In addition to serving traditional CSPs, we also serve a growing
number of customers who are either enablers of Internet services
or providers of information and content to Internet and
telephone users. For example, customers for our managed DNS
services include a wide range of both large and small
enterprises, including registry operators, such as Canadian
Internet Registration Authority, and
e-commerce
companies. All Internet service providers rely on our Internet
registry services to route all communications to .biz and .us
Internet addresses. Domain name registrars, including Network
Solutions, Inc., The Go Daddy Group, Inc., and Register.com,
Inc. pay us for each .biz and .us domain name they register on
behalf of their customers. Wireless service providers rely on
our registry to route all U.S. Common Short Code
communications, but the bulk of our customers for
U.S. Common Short Codes are the information and
entertainment content providers who register codes with us to
allow wireless subscribers to communicate with them via text
messaging. Mobile network operators throughout Europe and Asia,
including several country operators affiliated with Vodafone
Group Plc, rely on our instant messaging solutions to provide
mobile instant messaging to their end users.

Our customers include over 8,700 different entities, each of
which is separately billed for the services we provide,
regardless of whether it may be affiliated with one or more of
our other customers. No single entity accounted for more than
10% of our total revenue in 2008. The amount of our revenue
derived from customers inside the United States was
$317.3 million, $387.4 million and $434.0 million
for the years ended December 31, 2006, 2007 and 2008,
respectively. The amount of our revenue derived from customers
outside the United States was $15.7 million,
$41.8 million and $54.8 million for the years ended
December 31, 2006, 2007 and 2008, respectively. The amount
of our revenue derived under our contracts with North American
Portability Management LLC was $249.3 million,
$301.8 million and $331.8 million for the years ended
December 31, 2006, 2007 and 2008, respectively.

We have two business segments, Clearinghouse and NGM. For
further discussion of the operating results of our segments,
including revenue, income (loss) from operations, total assets,
goodwill, and intangible assets, as well as information
concerning our international operations, see Note 17 to our
Consolidated Financial Statements in Item 8.

Competition

Our services most frequently compete against the in-house
systems of our customers. We believe our services offer greater
reliability and flexibility on a more cost-effective basis than
these in-house systems.

In our roles as the North American Numbering Plan Administrator,
National Pooling Administrator, administrator of local number
portability for the communications industry, operator of the
sole authoritative registry for the .us and .biz Internet domain
names, and operator of the sole authoritative registry for
U.S. Common Short Codes, there are no other providers
currently providing the services we offer. However, we were
awarded the contracts to administer these services in open and
competitive procurement processes where we competed against
companies including Accenture Ltd, Computer Sciences
Corporation, Hewlett-Packard Company, International Business
Machines Corporation, or IBM, Noblis, Inc., Nortel Networks
Corporation, Pearson Education, Perot Systems Corporation,
Telcordia Technologies, Inc. and VeriSign, Inc. We have renewed
or extended the term of several of these contracts since we
first entered into them. As the terms of these contracts expire,
we expect that other companies may seek to bid on renewals or
new contracts, and we may not be successful in renewing them. In
addition, prior to the expiration of our contracts in 2015 to
provide number portability services, North American Portability
Management LLC could solicit, or our competitors may submit,
proposals to replace us, in whole or in part, as the provider of
the services covered by these contracts. Similarly, with respect
to our contracts to act as the North American Number Plan
Administrator, the National Pooling Administrator, operator of
the authoritative registry for the .us and .biz Internet domain
names, and the operator of the authoritative registry for
U.S. Common Short Codes, the relevant counterparty could
elect not to exercise the extension period under the contract,
if applicable, or to terminate the contract in accordance with
its terms, in which case we could be forced to compete with
other providers to continue providing the services covered by
the relevant contract. However, we believe that our position as
the incumbent provider with high customer satisfaction of these
services will enable us to compete favorably for contract
renewals or for new contracts to continue to provide these
services.

While we do not face direct competition for the registry of .us
and .biz Internet domain names, we compete with other companies
that maintain the registries for different domain names,
including VeriSign, Inc., which manages the .com and .net
registries, Afilias Limited, which manages the .org and .info
registries, and a number of managers of country-specific domain
name registries, such as .uk for domain names in the United
Kingdom.

For the remainder of our services, we compete against a range of
providers of interoperability and infrastructure services
and/or
software, as well as the in-house network management and
information technology organizations of our customers. Our
competitors, other than in-house network systems, generally fall
into these categories:

with respect to our Ultra services, companies such as Akamai
Technologies, Inc., Afilias Limited, F5 Networks, Inc.,
Keynote Systems, Inc., and Gomez, Inc., that compete with us in
one or more of our Ultra services, including internal and
external managed DNS services, network monitoring and load
testing;



with respect to mobile instant messaging, companies that develop
presence and instant messaging solutions, such as Nokia
Corporation and Colibria AS; and



with respect to order management services, companies such as
Synchronoss Technologies, Inc., Telcordia Technologies, Inc.,
Syniverse Technologies, Inc., Evolving Systems, Inc. and
VeriSign, Inc., which offer communications interoperability
services, including inter-CSP order processing and workflow
management on an outsourced basis.

Competitive factors in the market for our services include
breadth and quality of services offered, reliability, security,
cost-efficiency, and customer support. Our ability to compete
successfully depends on numerous factors, both within and
outside our control, including:



our responsiveness to customers needs;



our ability to support existing and new industry standards and
protocols;

the quality, reliability, security and price-competitiveness of
our services.

We may not be able to compete successfully against current or
future competitors and competitive pressures that we face may
materially and adversely affect our business. The market for
clearinghouse services may not continue to develop, and CSPs and
enterprises may not continue to use clearinghouse services
rather than in-house systems and purchased or
internally-developed software.

Employees

As of December 31, 2008, we employed 966 persons
worldwide. None of our employees is currently represented by a
labor union. We have not experienced any work stoppages and
consider our relationship with our employees to be good.

Contracts

We provide many of our addressing, interoperability and
infrastructure services pursuant to private commercial and
government contracts. Specifically, in the United States, we
provide wireline and wireless number portability, implement the
allocation of pooled blocks of telephone numbers and provide
network management services pursuant to seven regional contracts
with North American Portability Management LLC, an industry
group that represents all telecommunications service providers
in the United States. Although the FCC has plenary authority
over the administration of telephone number portability, it is
not a party to our contracts with North American Portability
Management LLC. The North American Numbering Council, a federal
advisory committee to which the FCC has delegated limited
oversight responsibilities, reviews and oversees North American
Portability Management LLCs management of these contracts.
See  Regulatory
Environment  Telephone Numbering. We
recognized revenue under our contracts with North American
Portability Management LLC primarily on a per transaction basis
through December 31, 2008, and the aggregate fees for
transactions processed under these contracts were determined by
the total number of transactions. As of January 1, 2009, we
are paid on an annual, fixed-fee basis, subject to a
contractually established, annual 6.5% escalator. Under this
fixed-fee model, fixed credits are used to calculate the annual
fixed fee in 2009, 2010 and 2011. In addition, our customers may
earn additional credits annually in 2009, 2010 and 2011 if
certain levels of aggregate telephone number inventories are
reached and if certain IP fields and functionality are adopted
and implemented. Moreover, in the event that the volume of
transactions in a given year is above or below the contractually
established volume range for that year, the fixed-fee may be
adjusted up or down, respectively, with any such adjustment
being applied in the following year. Under both the
transaction-based and fixed-fee models, our fees are billed to
telecommunications service providers based on their allocable
share of the total transaction charges. This allocable share is
based on each respective telecommunications service
providers share of the aggregate end-user services
revenues of all U.S. telecommunications service providers
as determined by the FCC. Under these contracts, we also bill a
revenue recovery collections, or RRC, fee of a percentage of
monthly billings to our customers, which is available to us if
any telecommunications service provider fails to pay its
allocable share of total transaction charges. If the RRC fee is
insufficient for that purpose, these contracts also provide for
the recovery of such differences from the remaining
telecommunications service providers. Under these contracts,
users of our clearinghouse also pay fees to connect to our data
center and additional fees for reports that we generate at the
users request. Our contracts with North American
Portability Management LLC continue through June 2015.

On November 3, 2005, BellSouth Corporation filed a petition
seeking changes in the way our customers are billed for services
provided by us under our contracts with North American
Portability Management LLC. In response to the BellSouth
petition, the FCC requested comments from interested parties. As
of February 17, 2009, the FCC had not initiated a formal
rulemaking process, and the BellSouth petition remains pending.
In addition, after the amendment of our contracts with North
American Portability Management LLC in September 2006, Telcordia
Technologies, Inc. filed a petition with the FCC requesting an
order that would require North American Portability Management
LLC to conduct a new bidding process to appoint a provider of
telephone number portability services in the United States,
which Telcordia has continued to pursue in response to our
amendment of these contracts in January 2009. As of
February 17, 2009, the FCC had not initiated a formal
rulemaking process,

and the Telcordia petition remains pending. If the Telcordia
petition is successful, we may lose one or more of our contracts
with North American Portability LLC or lose a portion of our
business in one or more geographic regions where we provide
services.

We also provide wireline and wireless number portability and
network management services in Canada pursuant to a contract
with the Canadian LNP Consortium Inc., a private corporation
composed of telecommunications service providers who participate
in number portability in Canada. The Canadian Radio-television
and Telecommunications Commission oversees the Canadian LNP
Consortiums management of this contract. We bill each
telecommunications service provider for our services under this
contract primarily on a per transaction basis. This contract
continues through December 2011. The services we provide under
the contracts with North American Portability Management LLC and
the Canadian LNP Consortium are subject to rigorous performance
standards, and we are subject to corresponding penalties for
failure to meet those standards.

We serve as the North American Numbering Plan Administrator and
the National Pooling Administrator pursuant to two separate
contracts with the FCC. Under these contracts, we administer the
assignment and implementation of new area codes in North
America, the allocation of central office codes (which are the
prefixes following the area codes) to telecommunications service
providers in the United States, and the assignment and
allocation of pooled blocks of telephone numbers in the United
States in a manner designed to conserve telephone number
resources. The North American Numbering Plan Administration
contract is a fixed-fee government contract that was awarded by
the FCC in 2003. The contract is structured as a one-year
agreement with four one-year options exercisable by the FCC. The
FCC has exercised each of these four options, and this contract
expired on July 8, 2008. The FCC extended the contract
through July 2009 to begin the bidding process and we expect to
compete for a renewal of this contract. The National Pooling
Administration contract was originally awarded to us by the FCC
in 2001. In August 2007, the FCC awarded us a new contract to
continue as the National Pooling Administrator. Under this
contract, we perform the administrative functions associated
with the allocation of pooled blocks of telephone numbers in the
United States. The terms of this contract provide for a fixed
fee associated with the administration of the pooling system
plus reimbursement of select costs. The initial contract term is
two years, commencing in August 2007, and provides three
one-year extension options that are exercisable at the election
of the FCC.

We are the operator of the .biz Internet top-level domain by
contract with the Internet Corporation for Assigned Names and
Numbers, or ICANN. The .biz contract was originally granted in
May 2001. In December 2006, the ICANN awarded to us a renewal of
the .biz contract through December 2012. Under the terms of the
amended agreement, the .biz contract automatically renews after
2012 unless it has been determined that we have been in
fundamental and material breach of certain provisions of the
agreement and have failed to cure such breach. Similarly,
pursuant to a contract with the U.S. Department of
Commerce, we operate the .us Internet domain registry. This
contract was originally awarded in October 2001. In October
2007, the government awarded to us a renewal of the .us contract
for a period of three years, which may be extended by the
government for two additional one-year periods. In response to a
bid protest filed by one of our competitors, the Department of
Commerce evaluated the procedures it followed in awarding to us
the .us contract. Pending resolution of this evaluation,
performance under our new .us contract was stayed, and the terms
of our previous .us contract remained in effect. The evaluation
was completed in August 2008 and the terms of the new .us
contract were amended. The amended contract expires in October
2011, with two one-year renewal options exercisable by the
Department of Commerce. The .biz and .us contracts allow us to
provide domain name registration services to domain name
registrars, who pay us on a per-name basis.

We have an exclusive contract with the CTIA  The
Wireless
Association®
to serve as the registry operator for the administration of
U.S. Common Short Codes. U.S. Common Short Codes are
short strings of numbers to which text messages can be
addressed  a common addressing scheme that works
across all participating wireless networks. We were awarded this
contract in October 2003 through an open procurement process by
the major wireless carriers. In June 2008, the contract was
amended to include a term through December 2015. We provide
U.S. Common Short Code registration services to wireless
content providers, who pay us subscription fees per
U.S. Common Short Code registered.

Overview. The Telecommunications Act of 1996
was enacted to remove barriers to entry in the communications
market. Among other things, the Telecommunications Act mandates
portability of telephone numbers and requires traditional
telephone companies to provide non-discriminatory access and
interconnection to potential competitors. The FCC has plenary
jurisdiction over issues relating to telephone numbers,
including telephone number portability and the administration of
telephone number resources. Under this authority, the FCC
promulgated regulations governing the administration of
telephone numbers and telephone number portability. In 1995, the
FCC established the North American Numbering Council, a federal
advisory committee, to advise and make recommendations to the
FCC on telephone numbering issues, including telephone number
resources administration and telephone number portability. The
members of the North American Numbering Council include
representatives from local exchange carriers, interexchange
carriers, wireless providers, VoIP providers, manufacturers,
state regulators, consumer groups, and telecommunications
associations.

Telephone Number Portability. The
Telecommunications Act requires telephone number portability,
which is the ability of users of telecommunications services to
retain existing telephone numbers without impairment of quality,
reliability, or convenience when switching from one
telecommunications service provider to another. Through a series
of competitive procurements, we were selected by a consortium of
service providers representing the telecommunications industry
to develop, build and operate a solution to enable telephone
number portability in the United States. We ultimately entered
into seven regional contracts to administer the system that we
developed, after which the North American Numbering Council
recommended to the FCC, and the FCC approved, our selection to
serve as a neutral administrator of telephone number
portability. The FCC also directed the seven original regional
entities, each comprising a consortium of service providers
operating in the respective regions, to manage and oversee the
administration of telephone number portability in their
respective regions, subject to North American Numbering
Council oversight. Under the rules and policies adopted by the
FCC, North American Portability Management LLC, as successor in
interest to the seven regional consortiums, has the power and
authority to negotiate master agreements with an administrator
of telephone number portability, so long as that administrator
is neutral.

North American Numbering Plan Administrator and National
Pooling Administrator. We have contracts with the
FCC to act as the North American Numbering Plan Administrator
and the National Pooling Administrator, and we must comply with
the rules and regulations of the FCC that govern our operations
in each capacity. We are charged with administering numbering
resources in an efficient and non-discriminatory manner, in
accordance with FCC rules and industry guidelines developed
primarily by the Industry Numbering Committee. These guidelines
provide governing principles and procedures to be followed in
the performance of our duties under these contracts. The
communications industry regularly reviews and revises these
guidelines to adapt to changed circumstances or as a result of
the experience of industry participants in applying the
guidelines. A committee of the North American Numbering Council
evaluates our performance against these rules and guidelines
each year and provides an annual review to the North American
Numbering Council and the FCC. If we violate these rules and
guidelines, or if we fail to perform at required levels, the FCC
may reevaluate our fitness to serve as the North American
Numbering Plan Administrator and the National Pooling
Administrator and may terminate our contracts or impose fines on
us. The division of the North American Numbering Council
responsible for reviewing our performance as the
North American Numbering Plan Administrator and the
National Pooling Administrator has determined that, with respect
to our performance in 2007, we more than met our
performance guidelines under each such respective review.
Similar reviews of our performance in 2008 have not yet been
completed.

Neutrality. Under FCC rules and orders
establishing the qualifications and obligations of the
North American Numbering Plan Administrator and National
Pooling Administrator, and under our contracts with North
American Portability Management LLC to provide telephone number
portability services, we are required to comply with neutrality
regulations and policies. Under these neutrality requirements,
we are required to operate our numbering plan, pooling
administration and number portability functions in a neutral and
impartial manner, which means that we cannot favor any
particular telecommunications service provider,
telecommunications industry segment or technology or group of
telecommunications consumers over any other

telecommunications service provider, industry segment,
technology or group of consumers in the conduct of those
businesses. We are examined periodically on our compliance with
these requirements by independent third parties. The combined
effect of our contracts and the FCCs regulations and
orders requires that we:



not be a telecommunications service provider, which is generally
defined by the FCC as an entity that offers telecommunications
services to the public at large, and is, therefore, providing
telecommunications services on a common carrier basis;



not be an affiliate of a telecommunications service provider,
which means, among other things, that we:



must restrict the beneficial ownership of our capital stock by
telecommunications service providers or affiliates of a
telecommunications service provider; and



may not otherwise, directly or indirectly, control, be
controlled by, or be under common control with, a
telecommunications service provider;



not derive a majority of our revenue from any single
telecommunications service provider; and



not be subject to undue influence by parties with a vested
interest in the outcome of numbering administration and
activities. Notwithstanding our satisfaction of the other
neutrality criteria above, the North American Numbering Council
or the FCC could determine that we are subject to such undue
influence. The North American Numbering Council may conduct an
evaluation to determine whether we meet this undue
influence criterion.

We are required to maintain confidentiality of competitive
customer information obtained during the conduct of our
business. In addition, as part of our neutrality framework, we
are required to comply with a code of conduct that is designed
to ensure our continued neutrality. Among other things, our code
of conduct, which was approved by the FCC, requires that:



we never, directly or indirectly, show any preference or provide
any special consideration to any telecommunications service
provider;



we prohibit access by our stockholders to user data and
proprietary information of telecommunications service providers
served by us (other than access of employee stockholders that is
incident to the performance of our numbering administration
duties);



our shareholders take steps to ensure that they do not disclose
to us any user data or proprietary information of any
telecommunications service provider in which they hold an
interest, other than the sharing of information in connection
with the performance of our numbering administration duties;



we not share confidential information about our business
services and operations with employees of any telecommunications
service provider;



we refrain from simultaneously employing, whether on a full-time
or part-time basis, any individual who is an employee of a
telecommunications service provider and that none of our
employees hold any interest, financial or otherwise, in any
company that would violate these neutrality standards;



we prohibit any individual who serves in the management of any
of our stockholders to be involved directly in our day-to-day
operations;



we implement certain requirements regarding the composition of
our board of directors;



no member of our board of directors simultaneously serves on the
board of directors of a telecommunications service
provider; and



we hire an independent party to conduct a quarterly neutrality
audit to ensure that we and our stockholders comply with all the
provisions of our code of conduct.

In connection with the neutrality requirements imposed by our
code of conduct and under our contracts, we are subject to a
number of neutrality audits that are performed on a quarterly
and semi-annual basis. In connection with these audits, all of
our employees, directors and officers must sign a neutrality
certification that states that they are

familiar with our neutrality requirements and have not violated
them. Failure to comply with applicable neutrality requirements
could result in government fines, corrective measures,
curtailment of contracts or even the revocation of contracts.
See Risk Factors  Risks Related to Our
Business  Failure to comply with neutrality
requirements could result in loss of significant contracts
in Item 1A of this report.

In contemplation of the initial public offering of our
securities, we sought and obtained FCC approval for a safe
harbor from previous orders of the FCC that required us to
seek prior approval from the FCC for any change in our overall
ownership structure, corporate structure, bylaws, or
distribution of equity interests, as well as certain types of
transactions, including the issuance of indebtedness by us.
Under the safe harbor order, we are required to maintain
provisions in our organizational and other corporate documents
that require us to comply with all applicable neutrality rules
and orders. However, we are no longer required to seek prior
approval from the FCC for many of these changes and
transactions, although we are required to provide notice of such
changes or transactions. In addition, we are subject to the
following requirements:



we may not issue indebtedness to any entity that is a
telecommunications service provider or an affiliate of a
telecommunications service provider without prior approval of
the FCC;



we may not acquire any equity interest in a telecommunications
service provider or an affiliate of a telecommunications service
provider without prior approval of the FCC;



we must restrict any telecommunications service provider or
affiliate of a telecommunications service provider from
acquiring or beneficially owning 5% or more of our outstanding
capital stock;



we must report to the FCC the names of any telecommunications
service providers or telecommunications service provider
affiliates that own a 5% or greater interest in our
company; and



we must make beneficial ownership records available to our
auditors, and must certify upon request that we have no actual
knowledge of any ownership of our outstanding capital stock by a
telecommunications service provider or telecommunications
service provider affiliate other than as previously disclosed.

Internet
Domain Name Registrations

We are also subject to government and industry regulation under
our Internet registry contracts with the U.S. government
and ICANN, the industry organization responsible for regulation
of Internet top-level domains. We are the operator of the .biz
Internet domain under a contract with ICANN originally granted
to us in May 2001, which currently runs through December 2012
and renews automatically thereafter unless it has been
determined that we have been in fundamental and material breach
of certain provisions of the agreement and have failed to cure
such breach. Similarly, pursuant to a contract with the
U.S. Department of Commerce, we operate the .us Internet
domain registry. This contract was originally granted in October
2001 and was renewed in October 2007 for a period of three
years, with two one-year extension periods exercisable at the
option of the U.S. Department of Commerce. In response to a
bid protest filed by one of our competitors, the Department of
Commerce evaluated the procedures it followed in awarding to us
the .us contract. Pending resolution of this evaluation,
performance under our new .us contract was stayed, and the terms
of our previous .us contract remained in effect. The evaluation
was completed in August 2008 and the contract terms were
amended. The amended contract expires in October 2011, with two
one-year renewal options exercisable by the Department of
Commerce. Under each of these registry service contracts, we are
required to:



provide equal access to all registrars of domain names;



comply with Internet standards established by the industry;



implement additional policies as they are adopted by the
U.S. government or ICANN; and



with respect to the .us registry, establish, operate and ensure
appropriate content on a kids.us domain to serve as a haven for
material that promotes positive experiences for children and
families using the Internet.

Our success depends in part upon our proprietary technology. We
rely principally upon trade secret and copyright law to protect
our technology, including our software, network design, and
subject matter expertise. We enter into confidentiality or
license agreements with our employees, distributors, customers,
and potential customers and limit access to and distribution of
our software, documentation, and other proprietary information.
We believe, however, that because of the rapid pace of
technological change, these legal protections for our services
are less significant factors in our success than the knowledge,
ability, and experience of our employees and the timeliness and
quality of services provided by us. With our entry into the IM
market, we have also sought to protect our technology and our
ability to deliver our IM solutions to our customers through
patent prosecution. In addition, we have recently expanded our
patent efforts in other service offerings.

Available
Information and Exchange Certifications

We maintain an Internet website at www.neustar.biz.
Information contained on, or that may be accessed through, our
website is not part of this report. Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to reports filed or furnished pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended, are available on the Investor Relations
section of our website under the heading SEC Filings by
NeuStar, as soon as reasonably practicable after we
electronically file such reports with, or furnish those reports
to, the Securities and Exchange Commission. Our Principles of
Corporate Governance, Board of Directors committee charters
(including the charters of the Audit Committee, Compensation
Committee, and Nominating and Corporate Governance Committee)
and code of ethics entitled Corporate Code of Business
Conduct also are available on the Investor Relations
section of our website. Stockholders may request free copies of
these documents, including a copy of our annual report on
Form 10-K,
by sending a written request to our Corporate Secretary at
NeuStar, Inc., 46000 Center Oak Plaza, Sterling, VA 20166. In
the event that we make any changes to, or provide any waivers
from, the provisions of our Corporate Code of Business Conduct,
we intend to disclose these events on our website or in a report
on
Form 8-K
within four business days of such event.

Because our common stock is listed on the NYSE, our Chief
Executive Officer is required to make an annual certification to
the NYSE stating that he is not aware of any violation by us of
the corporate governance listing standards of the NYSE. Our
Chief Executive Officer made his annual certification to that
effect to the NYSE on July 11, 2008. In addition, we have
filed, as an exhibit to this Annual Report on
Form 10-K,
the certification of our principal executive officer and
principal financial officer required under Section 302 of
the Sarbanes-Oxley Act of 2002 to be filed with the Securities
and Exchange Commission regarding the quality of our public
disclosure.

Cautionary
Note Regarding Forward-Looking Statements

This report contains forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such
as may, will, should,
expects, intends, plans,
anticipates, believes,
estimates, predicts,
potential, continue or the negative of
these terms or other comparable terminology. These statements
relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity,
performance or achievements to differ materially from any future
results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. Many
of these risks are beyond our ability to control or predict.
These risks and other factors include those listed under
Risk Factors in Item 1A of this report and
elsewhere in this report and include:



failures or interruptions of our systems and services;



security or privacy breaches;



loss of, or damage to, a data center;



termination, modification or non-renewal of our contracts to
provide telephone number portability and other clearinghouse
services;

loss of members of senior management, or inability to recruit
and retain skilled employees.

ITEM 1A.

RISK
FACTORS

Risks
Related to Our Business

The
loss of, or damage to, a data center or any other failure or
interruption to our network infrastructure could materially harm
our revenue and impair our ability to conduct our
operations.

Because virtually all of the services we provide require
communications service providers to query a copy of our
continuously updated databases and directories to obtain
necessary routing and other essential operational data, the
integrity of our data centers, including network elements
managed by third parties throughout the world, and the systems
through which we deliver our services is essential to our
business. Notably, our data centers and related systems are
essential to the orderly operation of the
U.S. telecommunications system because they enable CSPs to
ensure that telephone calls are routed to the appropriate
destinations.

Our system architecture is integral to our ability to process a
high volume of transactions in a timely and effective manner.
Moreover, both we and our customers rely on hardware, software
and other equipment developed, supported and maintained by
third-party providers. We could experience failures or
interruptions of our systems and services, or other problems in
connection with our operations, as a result of:



damage to, or failure of, our computer software or hardware or
our connections and outsourced service arrangements with third
parties;



failure of, or defects in, the third party systems, software or
equipment on which we or our customers rely to access our data
centers and other systems;



errors in the processing of data by our system;



computer viruses or software defects;



physical or electronic break-ins, sabotage, distributed denial
of service, or DDoS, attacks, intentional acts of vandalism and
similar events;

We may not have sufficient redundant systems or
back-up
facilities to allow us to receive and process data in the event
of one of the foregoing events. Further, we have increased the
scope of services that we provide, which has increased the
complexity of our network infrastructure. As the scope of
services we provide expands or changes in the future, we may be
required to make significant expenditures to establish new data
centers from which we may provide services. Moreover, as we add
customers, expand our service offerings and increase our
visibility in the

market, the likelihood that we will become a target of physical
or electronic break-ins, sabotage, DDoS attacks, intentional
acts of vandalism and similar events increases. If we cannot
adequately protect the ability of our data centers and related
systems to perform consistently at a high level and without
interruptions, or otherwise fail to meet our customers
expectations:



our reputation may be damaged, which may adversely affect our
ability to attract or retain customers for our existing
services, and may also make it more difficult for us to market
our services;



we may be subject to significant penalties or damages claims,
under our contracts or otherwise, including the requirement to
pay substantial penalties related to service level requirements
in our contracts;



we may be required to make significant expenditures to repair or
replace equipment, third party systems or, in some cases, an
entire data center, or to establish new data centers and systems
from which we may provide services;



our operating expenses or capital expenditures may increase as a
result of corrective efforts that we must perform;



our customers may postpone or cancel subsequently scheduled work
or reduce their use of our services; or



one or more of our significant contracts may be terminated
early, or may not be renewed.

Any of these consequences would adversely affect our revenue,
performance and business prospects.

Security
breaches could result in significant liabilities, interruptions
of service or reduced quality of service, which could increase
our costs or result in a reduction in the use of our services by
our customers.

Our systems may be vulnerable to physical break-ins, computer
viruses, attacks by computer hackers or similar disruptive
problems. If unauthorized users gain access to our databases,
they may be able to steal, publish, delete or modify sensitive
information that is stored or transmitted on our networks and
that we are required by our contracts and FCC rules to keep
confidential. Such a security or privacy breach could subject us
to significant penalties as well as claims for damages under our
contracts. Further, a security or privacy breach could result in
an interruption of service or reduced quality of service, and we
may be required to make significant expenditures in connection
with corrective efforts we are required to perform. In addition,
a security or privacy breach may harm our reputation and cause
our customers to reduce their use of our services, which could
harm our revenue and business prospects.

Our
seven contracts with North American Portability Management LLC
represent in the aggregate a substantial portion of our revenue,
are not exclusive and could be terminated or modified in ways
unfavorable to us, and we may be unable to renew these contracts
at the end of their term.

Our seven contracts with North American Portability Management
LLC, an industry group that represents all telecommunications
service providers in the United States, to provide telephone
number portability and other clearinghouse services are not
exclusive and could be terminated or modified in ways
unfavorable to us. These seven separate contracts, each of which
represented between 6% and 14% of our total revenue in 2008,
represented in the aggregate approximately 68% of our total
revenue in 2008. North American Portability Management LLC
could, at any time, solicit or receive proposals from other
providers to provide services that are the same as or similar to
ours. In addition, these contracts have finite terms and are
currently scheduled to expire in June 2015. Furthermore, any of
these contracts could be terminated in advance of its scheduled
expiration date in limited circumstances, most notably if we are
in default of these agreements. Although these contracts do not
contain cross-default provisions, conditions leading to a
default by us under one of our contracts could lead to a default
under others, or all seven.

We may be unable to renew these contracts on acceptable terms
when they are considered for renewal if we fail to meet our
customers expectations, including for performance or other
reasons, or if another provider offers to provide the same or
similar services at a lower cost. In addition, competitive
forces resulting from the possible entrance of a competitive
provider could create significant pricing pressure, which could
then cause us to reduce the selling price of our services under
our contracts. If these contracts are terminated or modified in
a manner that is adverse to us, or if we are unable to renew
these contracts on acceptable terms upon their expiration, it
would have a material adverse effect on our business, prospects,
financial condition and results of operations.

Certain
of our other contracts may be terminated or we may be unable to
renew these contracts, which may reduce the number of services
we can offer and damage our reputation.

In addition to our contracts with North American Portability
Management LLC, we rely on other contracts to provide other
services that we offer, including the contracts that appoint us
to serve as the:



North American Numbering Plan Administrator, under which we
maintain the authoritative database of telephone numbering
resources in North America;



National Pooling Administrator, under which we perform the
administrative functions associated with the administration and
management of telephone number inventory and allocation of
pooled blocks of unassigned telephone numbers;



provider of number portability services in Canada;



operator of the .us registry;



operator of the .biz registry; and



operator of the registry of U.S. Common Short Codes.

Each of these contracts provides for early termination in
limited circumstances, most notably if we are in default. In
addition, our contracts to serve as the North American Numbering
Plan Administrator and as the National Pooling Administrator and
to operate the .us registry, each of which is with the
U.S. government, may be terminated by the government at
will. If we fail to meet the expectations of the FCC, the
U.S. Department of Commerce or our customers, as the case
may be, for any reason, including for performance-related or
other reasons, or if another provider offers to perform the same
or similar services for a lower price, we may be unable to
extend or renew these contracts. Further, with respect to the
renewal or extension of any of our government contracts, we may
be subject to bid protests from a competitor, which may require
the dedication of substantial company resources, and may result
in the loss of the contract. If we were unable to renew or
extend any of these contracts, the number of services we are
able to offer may be reduced, which would adversely affect our
revenue from the provision of these services. Further, each of
the contracts listed above establishes us as the sole provider
of the particular services covered by that contract during its
term. If one of these contracts were terminated, or if we were
unable to renew or extend the term of any particular contract,
we would no longer be able to provide the services covered by
that contract and could suffer a loss of prestige that would
make it more difficult for us to compete for contracts to
provide similar services in the future.

Failure
to comply with neutrality requirements could result in loss of
significant contracts.

Pursuant to orders and regulations of the U.S. government
and provisions contained in our material contracts, we must
continue to comply with certain neutrality requirements, meaning
generally that we cannot favor any particular telecommunications
service provider, telecommunications industry segment or
technology or group of telecommunications consumers over any
other telecommunications service provider, industry segment,
technology or group of consumers in the conduct of our business.
The FCC oversees our compliance with the neutrality requirements
applicable to us in connection with some of the services we
provide. We provide to the FCC and the North American Numbering
Council, a federal advisory committee established by the FCC to
advise and make recommendations on telephone numbering issues,
regular certifications relating to our compliance with these
requirements. Our ability to comply with the neutrality
requirements to which we are subject may be affected by the
activities of our stockholders or other parties. For example, if
the ownership of our capital stock subjects us to undue
influence by parties with a vested interest in the outcome of
numbering administration, the FCC could determine that we are
not in compliance with our neutrality obligations. Our failure
to continue to comply with the neutrality requirements to which
we are subject under applicable orders and regulations of the
U.S. government and commercial contracts may result in
fines, corrective measures or termination of our contracts, any
one of which could have a material adverse effect on our results
of operations.

Regulatory
and statutory changes that affect us or the communications
industry in general may increase our costs or otherwise
adversely affect our business.

The FCC has regulatory authority over certain aspects of our
operations, most notably our compliance with our neutrality
requirements. We are also affected by business risks specific to
the regulated communications industry. Moreover, the business of
our customers is subject to regulation that indirectly affects
our business. As communications technologies and the
communications industry continue to evolve, the statutes
governing the communications industry or the regulatory policies
of the FCC may change. If this were to occur, the demand for our
services could change in ways that we cannot predict and our
revenue could decline. These risks include the ability of the
federal government, most notably the FCC, to:



increase regulatory oversight over the services we provide;



adopt or modify statutes, regulations, policies, procedures or
programs that are disadvantageous to the services we provide, or
that are inconsistent with our current or future plans, or that
require modification of the terms of our existing contracts,
including the manner in which we charge for certain of our
services. For example,



In November 2005, BellSouth Corporation filed a petition with
the FCC seeking changes in the way our customers are billed for
services provided by us under our contracts with North American
Portability Management LLC; and



After the amendment of our contracts with North American
Portability Management LLC in September 2006, Telcordia
Technologies, Inc. filed a petition with the FCC requesting an
order that would require North American Portability Management
LLC to conduct a new bidding process to appoint a provider of
telephone number portability services in the United States,
which Telcordia has continued to pursue in response to our
amendment of these contracts in January 2009. If successful,
this petition could result in the loss of one or more of our
contracts with North American Portability Management LLC or
otherwise frustrate our strategic plans;



prohibit us from entering into new contracts or extending
existing contracts to provide services to the communications
industry based on actual or suspected violations of our
neutrality requirements, business performance concerns, or other
reasons;



adopt or modify statutes, regulations, policies, procedures or
programs in a way that could cause changes to our operations or
costs or the operations of our customers;



appoint, or cause others to appoint, substitute or add
additional parties to perform the services that we currently
provide; and



prohibit or restrict the provision or export of new or expanded
services under our contracts, or prevent the introduction of
other services not under the contracts based upon restrictions
within the contracts or in FCC policies.

In addition, we are subject to risks arising out of the
delegation of the Department of Commerces responsibilities
for the domain name system to the International Corporation for
Assigned Names and Numbers, or ICANN. Changes in the regulations
or statutes to which our customers are subject could cause our
customers to alter or decrease the services they purchase from
us. We cannot predict when, or upon what terms and conditions,
further regulation or deregulation might occur or the effect
future regulation or deregulation may have on our business.

If we
do not adapt to rapid technological change, we could lose
customers or market share.

Our industry is characterized by rapid technological change and
frequent new service offerings. Significant technological
changes could make our technology and services obsolete. We must
adapt to our rapidly changing market by continually improving
the features, functionality, reliability and responsiveness of
our addressing, interoperability and infrastructure services,
and by developing new features, services and applications to
meet changing customer needs. Our ability to take advantage of
opportunities in the market may require us to invest in

development and incur other expenses well in advance of our
ability to generate revenue from these services. We cannot
guarantee that we will be able to adapt to these challenges or
respond successfully or in a cost-effective way, particularly in
the early stages of launching a new service. Further, we may
experience delays in the development of one or more features of
our solutions, which could materially reduce the potential
benefits to us for providing these services. In addition, there
can be no assurance that our solutions will be adopted by
potential customers, or that we will be able to reach acceptable
contract terms with customers to provide these services. Our
failure to adapt to meet market demand in a cost-effective
manner could adversely affect our ability to compete and retain
customers or market share.

Our
customers face implementation and support challenges in
introducing
IP-based
services, which may slow their rate of adoption or
implementation of our solutions.

Historically, communications service providers have been
relatively slow to implement new, complex services such as
instant messaging and other
IP-based
communications. For example, during 2008, we witnessed slower
than anticipated deployment of our mobile instant messaging
solutions by our carrier customers. We have limited or no
control over, and cannot accurately predict, the pace at which
communications service providers implement these new
IP-based
services. Moreover, the launch of new
IP-based
services by communications service providers requires
significant expenditures by our customers to market and drive
adoption by end users. We cannot control the decision over
whether such expenditures will occur or the timing of such
expenditures. In turn, even if CSPs attempt to drive adoption of
new IP-based
services, our future revenue and profits will also depend, in
part, on the wide adoption of such services by end users. For
instance, we may be required to expend substantial resources to
support the efforts of our customers to market and drive the
adoption of our mobile instant messaging services by end users.
The failure of, or delay by, communications service providers to
introduce and support
IP-based
services utilizing our solutions in a timely and effective
manner, or the failure by end users to adopt such services,
could have a material adverse effect on our business and
operating results.

The
market for certain of our addressing, interoperability, and
infrastructure services is competitive, which could result in
fewer customer orders, reduced revenue or margins or loss of
market share.

Our services frequently compete against the in-house systems of
our customers. In addition, although we are not a
telecommunications service provider, we compete in some areas
against communications service companies, communications
software companies and system integrators that provide systems
and services used by CSPs to manage their networks and internal
operations in connection with telephone number portability,
instant messaging and other communications transactions. We face
competition from large, well-funded providers of addressing,
interoperability and infrastructure services. Moreover, we are
aware of other companies that are focusing significant resources
on developing and marketing services that will compete with us.
We anticipate continued growth of competition. Some of our
current and potential competitors have significantly more
employees and greater financial, technical, marketing and other
resources than we have. Our competitors may be able to respond
more quickly to new or emerging technologies and changes in
customer requirements than we can. Also, many of our current and
potential competitors have greater name recognition that they
can use to their advantage. Increased competition could result
in fewer customer orders, reduced revenue, reduced margins or
loss of market share, any of which would harm our business.

Our
strategic initiatives relating to mobile instant messaging may
be frustrated by the actions of other industry participants with
strategic objectives that are different than ours, as well as
those of our competitors.

Our mobile instant messaging solutions are integrated with the
systems of our CSP customers and with mobile devices, and rely
in part on our ability to interoperate with large Internet
portals such as Yahoo! and Microsoft. Because our strategic
objectives may not be aligned with those of our customers or the
Internet portals, and because our customers and the Internet
portals may not agree on the manner in which mobile instant
messaging should operate, our ability to execute on our strategy
may be frustrated. As a result, revenue from our instant
messaging solutions may not grow as expected and may decline. In
addition, some of our mobile instant messaging solutions rely on
the use of open standards. If we are unable to integrate our
instant messaging solutions with systems used by

our customers or device manufacturers because they do not adopt
open standards or otherwise, revenue from our instant messaging
solutions may not grow as expected and may decline. Moreover,
the proliferation of open standards and protocols could make it
easier for new market entrants and existing competitors to
introduce products that compete with our solutions, which could
adversely affect our business and operating results.

If we
were unable to protect our intellectual property rights
adequately, the value of our services and solutions could be
diminished.

Our success is dependent in part on obtaining, maintaining and
enforcing our proprietary rights and our ability to avoid
infringing on the proprietary rights of others. While we take
precautionary steps to protect our technological advantages and
intellectual property and rely in part on patent, trademark,
trade secret and copyright laws, we cannot assure that the
precautionary steps we have taken will completely protect our
intellectual property rights. Because patent applications in the
United States are maintained in secrecy until either the patent
application is published or a patent is issued, we may not be
aware of third-party patents, patent applications and other
intellectual property relevant to our services and solutions
that may block our use of our intellectual property or may be
used by third-parties who compete with our services and
solutions.

As we expand our business and introduce new services and
solutions, there may be an increased risk of infringement and
other intellectual property claims by third parties. From time
to time, we and our customers may receive claims alleging
infringement of intellectual property rights, or may become
aware of certain third party patents that may relate to our
services and solutions. For example, our instant messaging
solutions are designed to conform to Open Mobile Alliance, or
OMA, specifications and those of other standards bodies. To the
extent that any individual or organization that has contributed
intellectual property to OMA or other standards bodies claims
that it has retained its rights relating to such intellectual
property, we may be subject to claims of infringement by such
individuals or organizations, some of which have greater
financial resources and larger intellectual property portfolios
than our own.

Additionally, some of our customer agreements require that we
indemnify our customers for infringement claims resulting from
their use of our intellectual property embedded in their
products. Any litigation regarding patents or other intellectual
property could be costly and time consuming and could divert our
management and key personnel from our business operations. The
complexity of the technology involved, and the number of parties
holding intellectual property within the communications
industry, increase the risks associated with intellectual
property litigation. Moreover, the commercial success of our
services and solutions may increase the risk that an
infringement claim may be made against us. Royalty or licensing
arrangements, if required, may not be available on terms
acceptable to us, if at all. Any infringement claim successfully
asserted against us or against a customer for which we have an
obligation to defend could result in costly litigation, the
payment of substantial damages, and an injunction that prohibits
us from continuing to offer the service or solution in question,
any of which could have a material adverse effect on our
business, operating results and financial condition.

Our
intellectual property could be misappropriated, which could
force us to become involved in expensive and time-consuming
litigation.

Our ability to compete and continue to provide technological
innovation is substantially dependent upon internally developed
technology. We rely on a combination of patent, copyright, and
trade secret laws to protect our intellectual property or
proprietary rights in such technology. Despite our efforts to
protect our intellectual property and proprietary rights,
unauthorized parties may copy or otherwise obtain and use our
products, technology or trademarks. Effectively policing our
intellectual property is time consuming and costly, and the
steps taken by us may not prevent infringement of our
intellectual property or proprietary rights in our products,
technology and trademarks, particularly in foreign countries
where in many instances the local laws or legal systems do not
offer the same level of protection as in the United States.

Our competitors and customers may cause us to reduce the prices
we charge for our services and solutions. The primary sources of
pricing pressure include:



competitors offering our customers services at reduced prices,
or bundling and pricing services in a manner that makes it
difficult for us to compete. For example, a competing provider
of interoperability services might offer its services at lower
rates than we do, a competing domain name registry provider may
reduce its prices for domain name registration or an ISP or a
competitor may offer mobile instant messaging solutions at
reduced prices or at no cost to the customer;



customers with a significant volume of transactions may have
enhanced leverage in pricing negotiations with us; and



if our prices are too high, potential customers may find it
economically advantageous to handle certain functions internally
instead of using our services.

We may not be able to offset the effects of any price reductions
by increasing the number of transactions we handle or the number
of customers we serve, by generating higher revenue from
enhanced services or by reducing our costs.

A
significant decline in the volume of transactions we handle
could have a material adverse effect on our results of
operations.

Under our contracts with North American Portability Management
LLC, we earn revenue for telephone number portability services
on an annual, fixed-fee basis. However, in the event that the
volume of transactions in a given year is above or below the
contractually established volume range for that year, the
fixed-fee may be adjusted up or down, respectively, with any
such adjustment being applied to the following years
invoices. In addition, under our contract with the Canadian LNP
Consortium Inc., we earn revenue on a per transaction basis. As
a result, if industry participants in the United States reduce
their usage of our services in a particular year to levels below
the established volume range for that year or if industry
participants in Canada reduce their usage of our services from
their current levels, our revenue and results of operations may
suffer. For example, consolidation in the industry could result
in a decline in transactions if the remaining CSPs decide to
handle changes to their networks internally rather than use the
services that we provide. Moreover, if customer churn among CSPs
in the industry stabilizes or declines, or if CSPs do not
compete vigorously to lure customers away from their
competitors, use of our telephone number portability and other
services may decline. If CSPs develop internal systems to
address their infrastructure needs, or if the cost of such
transactions makes it impractical for a given carrier to use our
services for these purposes, we may experience a reduction in
transaction volumes. Finally, the trends that we believe will
drive the future demand for our clearinghouse services, such as
the emergence of IP services, growth of wireless services,
consolidation in the industry, and pressure on carriers to
reduce costs, may not actually result in increased demand for
our existing services or for the ancillary directory services
that we expect to offer, which would harm our future revenue and
growth prospects.

If we
are unable to manage our costs, our profits could be adversely
affected.

Historically, sustaining our growth has placed significant
demands on our management as well as on our administrative,
operational and financial resources. For us to continue to
manage our expanded operations, as well as any future growth, we
must continue to improve our operational, financial and
management information systems and expand, motivate and manage
our workforce. If we are unable to successfully manage our costs
without compromising our quality of service, or if new systems
that we implement to assist in managing our operations do not
produce the expected benefits, we may experience higher turnover
in our customer base and our revenue and profits could be
adversely affected.

We may
be unable to complete suitable acquisitions, or we may undertake
acquisitions that could increase our costs or liabilities or be
disruptive to our business.

We have made a number of acquisitions in the past, and one of
our strategies is to pursue acquisitions selectively in the
future. We may not be able to locate suitable acquisition
candidates at prices that we consider appropriate or on terms
that are satisfactory to us. If we do identify an appropriate
acquisition candidate, we may not be able to successfully
negotiate the terms or, if the acquisition occurs, integrate the
acquired business into our existing business. Acquisitions of
businesses or other material operations may require additional
debt or equity financing, resulting in additional leverage or
dilution to our stockholders. Integration of acquired business
operations could disrupt our business by diverting management
away from day-to-day operations. The difficulties of integration
may be increased by the necessity of coordinating geographically
dispersed organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures.
We also may not realize cost efficiencies or synergies or other
benefits that we anticipated when selecting our acquisition
candidates, and we may be required to invest significant capital
and resources after acquisition to maintain or grow the
businesses that we acquire. In addition, we may need to record
write-downs from impairments of goodwill or intangible assets
that occur after the closing of the transaction, which could
reduce our future reported earnings. If we fail to successfully
integrate and support the operations of the businesses we
acquire, or if anticipated revenue enhancements and cost savings
are not realized from these acquired businesses, our business,
results of operations and financial condition would be
materially adversely affected. Further, at times, acquisition
candidates may have liabilities, neutrality-related risks or
adverse operating issues that we fail to discover through due
diligence prior to the acquisition. The failure to discover such
issues prior to such acquisition could have a material adverse
effect on our business and results of operations.

An
impairment in the carrying value of goodwill or long-lived
assets could negatively impact our consolidated results of
operations and net worth.

Goodwill is initially recorded at fair value and is not
amortized, but is reviewed for impairment at least annually or
more frequently if impairment indicators are present. In
general, long-lived assets are only reviewed for impairment if
impairment indicators are present. In assessing goodwill and
long-lived assets for impairment, we make significant estimates
and assumptions, including estimates and assumptions about
market penetration, anticipated growth rates, and risk-adjusted
discount rates based on our budgets, business plans, economic
projections, anticipated future cash flows and industry data.
Some of the estimates and assumptions used by management have a
high degree of subjectivity and require significant judgment on
the part of management. This is particularly the case for our
NGM business due to its early stage of operations and the
emerging nature of mobile instant messaging technology. Changes
in estimates and assumptions in the context of our impairment
testing may have a material impact, and any potential impairment
charges could substantially affect our financial results in the
periods of such charges.

Our
expansion into international markets may be subject to
uncertainties that could increase our costs to comply with
regulatory requirements in foreign jurisdictions, disrupt our
operations, and require increased focus from our
management.

Our instant messaging solutions predominantly target
international markets. In addition, we are pursuing, and we
intend to pursue in the future, other international business
opportunities. International operations and business expansion
plans are subject to numerous additional risks, including:



economic and political risks in foreign jurisdictions in which
we operate or seek to operate;



difficulty of enforcing contracts and collecting receivables
through some foreign legal systems;



differences in foreign laws and regulations, including foreign
tax, intellectual property, labor and contract law, as well as
unexpected changes in legal and regulatory requirements;

fluctuations in currency exchange rates and any imposition of
currency exchange controls;



increased competition by local, regional, or global
companies; and



difficulties associated with managing a large organization
spread throughout various countries.

If we continue to expand our business globally, our success will
depend, in large part, on our ability to anticipate and
effectively manage these and other risks associated with our
international operations. However, any of these factors could
adversely affect our international operations and, consequently,
our operating results.

Our
senior management is important to our customer relationships,
and the loss of one or more of our senior managers could have a
negative impact on our business.

We believe that our success depends in part on the continued
contributions of our senior management. We rely on our executive
officers and senior management to generate business and execute
programs successfully. In addition, the relationships and
reputation that members of our management team have established
and maintain with our customers and our regulators contribute to
our ability to maintain good customer relations. If we do not
retain our senior management, or if we fail to plan adequately
for the succession of such individuals, our customer
relationships, results of operations and financial condition may
be adversely affected.

We
must recruit and retain skilled employees to succeed in our
business, and our failure to recruit and retain qualified
employees could harm our ability to maintain and grow our
business.

We believe that an integral part of our success is our ability
to recruit and retain employees who have advanced skills in the
services and solutions that we provide and who work well with
our customers in the regulated environment in which we operate.
In particular, we must hire and retain employees with the
technical expertise and industry knowledge necessary to maintain
and continue to develop our operations and must effectively
manage our growing sales and marketing organization to ensure
the growth of our operations. Our future success depends on the
ability of our sales and marketing organization to establish
direct sales channels and to develop multiple distribution
channels with Internet service providers and other third
parties. The employees with the skills we require are in great
demand and are likely to remain a limited resource in the
foreseeable future. If we are unable to recruit and retain a
sufficient number of these employees at all levels, our ability
to maintain and grow our business could be negatively impacted.

Risks
Related to the Financial Market Conditions

The
recent financial crisis could negatively affect market
utilization of our existing and new services and may harm our
financial results.

Our success depends on our ability to generate revenues from our
existing services and our introduction of new services,
extensions of existing services and geographic expansion. For
some of the services we provide, the market has only recently
developed, and the viability and profitability of these services
is unproven. Our ability to grow our business will be
compromised if we do not develop and market services that
achieve broad market acceptance with our current and potential
customers. If our service offerings do not gain widespread
market acceptance, our financial results could suffer. The
global economic disruption experienced during the second half of
2008, and any continuing unfavorable changes in economic
conditions, may result in lower overall spending by our current
and potential customers, and adversely affect our ability to
generate revenue from our existing services, introduce new
services or extensions of existing services and expand
geographically. If the economic downturn is prolonged, we may
have difficulty in maintaining and establishing a market for our
existing and new services and our financial performance may
suffer.

Funds
invested in auction rate securities that we hold may not be
accessible in the short term, and we may be required to adjust
the carrying value of these securities through an asset
impairment charge.

As of December 31, 2008, we had investments in auction rate
securities, or ARS, with an aggregate par value totaling
approximately $41.7 million, all of which are classified as
noncurrent. Our ARS are floating rate securities with long-term
maturities, certain of which have underlying assets that are
guaranteed by third parties, and all of

which were marketed by financial institutions with auction reset
dates primarily at 28 or 35 day intervals to provide
short-term liquidity. Beginning in February 2008, auctions for
these securities began to fail, which has decreased the
short-term liquidity of these securities and caused the interest
rates earned on these securities to increase. The remaining
contractual maturities of these securities range from 16 to
38 years. We will not be able to access these remaining
funds until a future auction for these ARS is successful, we
sell the securities in a secondary market, or they are redeemed
by the issuer. We can make no assurance that we would be able to
sell our ARS in a secondary market at a favorable price or
otherwise. We have the right to require the issuer of our ARS to
repurchase the ARS at par value beginning on June 30, 2010.
If the credit rating of either the issuer of the ARS or the
third-party insurers of the underlying investments deteriorates,
we may be required to further adjust the carrying value of the
ARS through a loss in current period earnings.

We may
need additional capital in the future and it may not be
available on acceptable terms.

We have historically relied on outside financing and cash flow
from operations to fund our operations, capital expenditures and
expansion. We may require additional capital in the future to
fund our operations, finance investments in equipment or
infrastructure, or respond to competitive pressures or strategic
opportunities. However, our neutrality requirements may limit or
prohibit our ability to obtain debt or equity financing by
restricting the ability of certain parties from acquiring our
stock or our debt, or the amount that such parties may acquire.
In addition, difficulties in the global credit markets have
resulted in a substantial decrease in the availability of
credit. Some commercial banks are refusing to provide financing,
others are imposing more onerous terms on borrowers, including
higher interest rates. As a result, additional financing may not
be available on terms favorable to us, or at all. Further, the
terms of available financing may place limits on our financial
and operating flexibility. If we are unable to obtain sufficient
capital in the future, we may:



not be able to continue to meet customer demand for service
quality, availability and competitive pricing;



be forced to reduce our operations;



not be able to expand or acquire complementary
businesses; and



not be able to develop new services or otherwise respond to
changing business conditions or competitive pressures.

Risks
Related to Our Common Stock

Our
common stock price may be volatile.

The market price of our Class A common stock may fluctuate
widely. Fluctuations in the market price of our Class A
common stock could be caused by many things, including:



our perceived prospects and the prospects of the telephone and
Internet industries in general;



differences between our actual financial and operating results
and those expected by investors and analysts;



changes in analysts recommendations or projections;



changes in general valuations for communications companies;



adoption or modification of regulations, policies, procedures or
programs applicable to our business;



sales of our Class A common stock by our officers,
directors or principal stockholders;



sales of significant amounts of our Class A common stock in
the public market, or the perception that such sales may occur;



sales of our Class A common stock due to a required
divestiture under the terms of our certificate of
incorporation; and



changes in general economic or market conditions and broad
market fluctuations.

Each of these factors, among others, could have a material
adverse effect on the market price of our Class A common
stock. Recently, the stock market in general has experienced
extreme price fluctuations. This volatility has had a
substantial effect on the market prices of securities issued by
many companies for reasons unrelated to the operating
performance of the specific companies. Some companies that have
had volatile market prices for their securities have had
securities class action suits filed against them. If a suit were
to be filed against us, regardless of the outcome, it could
result in substantial costs and a diversion of our
managements attention and resources. This could have a
material adverse effect on our business, prospects, financial
condition and results of operations.

Delaware
law and provisions in our certificate of incorporation and
bylaws could make a merger, tender offer or proxy contest
difficult, and the market price of our Class A common stock
may be lower as a result.

We are a Delaware corporation, and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change of control would be beneficial to
our existing stockholders. In addition, our certificate of
incorporation and bylaws may discourage, delay or prevent a
change in our management or control over us that stockholders
may consider favorable. Our certificate of incorporation and
bylaws:



authorize the issuance of blank check preferred
stock that could be issued by our board of directors to thwart a
takeover attempt;



prohibit cumulative voting in the election of directors, which
would otherwise enable holders of less than a majority of our
voting securities to elect some of our directors;



establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following election;



require that directors only be removed from office for cause;



provide that vacancies on the board of directors, including
newly-created directorships, may be filled only by a majority
vote of directors then in office;



disqualify any individual from serving on our board if such
individuals service as a director would cause us to
violate our neutrality requirements;



limit who may call special meetings of stockholders;



prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders; and



establish advance notice requirements for nominating candidates
for election to the board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings.

In
order to comply with our neutrality requirements, our
certificate of incorporation contains ownership and transfer
restrictions relating to telecommunications service providers
and their affiliates, which may inhibit potential acquisition
bids that our stockholders may consider favorable, and the
market price of our Class A common stock may be lower as a
result.

In order to comply with neutrality requirements imposed by the
FCC in its orders and rules, no entity that qualifies as a
telecommunications service provider or affiliate of
a telecommunications service provider, as such terms are defined
under the Communications Act of 1934 and FCC rules and orders,
may beneficially own 5% or more of our capital stock. As a
result, subject to limited exceptions, our certificate of
incorporation prohibits any telecommunications service provider
or affiliate of a telecommunications service provider from
beneficially owning, directly or indirectly, 5% or more of our
outstanding capital stock. Among other things, our certificate
of incorporation provides that:



if one of our stockholders experiences a change in status or
other event that results in the stockholder violating this
restriction, or if any transfer of our stock occurs that, if
effective, would violate the 5% restriction, we may

elect to purchase the excess shares (i.e., the shares that cause
the violation of the restriction) or require that the excess
shares be sold to a third party whose ownership will not violate
the restriction;



pending a required divestiture of these excess shares, the
holder whose beneficial ownership violates the 5% restriction
may not vote the shares in excess of the 5% threshold; and



if our board of directors, or its permitted designee, determines
that a transfer, attempted transfer or other event violating
this restriction has taken place, we must take whatever action
we deem advisable to prevent or refuse to give effect to the
transfer, including refusal to register the transfer, disregard
of any vote of the shares by the prohibited owner, or the
institution of proceedings to enjoin the transfer.

Our board of directors has the authority to make determinations
as to whether any particular holder of our capital stock is a
telecommunications service provider or an affiliate of a
telecommunications service provider. Any person who acquires, or
attempts or intends to acquire, beneficial ownership of our
stock that will or may violate this restriction must notify us
as provided in our certificate of incorporation. In addition,
any person who becomes the beneficial owner of 5% or more of our
stock must notify us and certify that such person is not a
telecommunications service provider or an affiliate of a
telecommunications service provider. If a 5% stockholder fails
to supply the required certification, we are authorized to treat
that stockholder as a prohibited owner  meaning,
among other things, that we may elect to purchase the excess
shares or require that the excess shares be sold to a third
party whose ownership will not violate the restriction. We may
request additional information from our stockholders to ensure
compliance with this restriction. Our board will treat any
group, as that term is defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, as
a single person for purposes of applying the ownership and
transfer restrictions in our certificate of incorporation.

Nothing in our certificate of incorporation restricts our
ability to purchase shares of our capital stock. If a purchase
by us of shares of our capital stock results in a
stockholders percentage interest in our outstanding
capital stock increasing to over the 5% threshold, such
stockholder must deliver the required certification regarding
such stockholders status as a telecommunications service
provider or affiliate of a telecommunications service provider.
In addition, to the extent that a repurchase by us of shares of
our capital stock causes any stockholder to violate the
restrictions on ownership and transfer contained in our
certificate of incorporation, that stockholder will be subject
to all of the provisions applicable to prohibited owners,
including required divestiture and loss of voting rights.

These restrictions and requirements may:



discourage industry participants that might have otherwise been
interested in acquiring us from making a tender offer or
proposing some other form of transaction that could involve a
premium price for our shares or otherwise be in the best
interests of our stockholders; and



discourage investment in us by other investors who are
telecommunications service providers or who may be deemed to be
affiliates of a telecommunications service provider.

The standards for determining whether an entity is a
telecommunications service provider are established
by the FCC. In general, a telecommunications service provider is
an entity that offers telecommunications services to the public
at large, and is, therefore, providing telecommunications
services on a common carrier basis. Moreover, a party will be
deemed to be an affiliate of a telecommunications service
provider if that party controls, is controlled by, or is under
common control with, a telecommunications service provider. A
party is deemed to control another if that party, directly or
indirectly:



owns 10% or more of the total outstanding equity of the other
party;



has the power to vote 10% or more of the securities having
ordinary voting power for the election of the directors or
management of the other party; or



has the power to direct or cause the direction of the management
and policies of the other party.

The standards for determining whether an entity is a
telecommunications service provider or an affiliate of a
telecommunications service provider and the rules applicable to
telecommunications service providers and their affiliates are
complex and may be subject to change. Each stockholder is
responsible for notifying us if it is a telecommunications
service provider or an affiliate of a telecommunications service
provider.

Our corporate headquarters are located in Sterling, Virginia
under leases that are scheduled to expire in July and August
2010. We have two five-year renewal options on these leases.

In addition, we lease operating space in Staines, United
Kingdom, Haifa, Israel, Dusseldorf, Germany, Milan, Italy, Hong
Kong and Singapore. Within the United States, we also lease
operating space in North Carolina, the District of Columbia,
Arizona, Washington and California. These domestic and
international leases expire on various dates through March 2017.
We believe that our existing facilities are sufficient to meet
our requirements, and that new space will be available on
commercially reasonable terms as we expand.

ITEM 3.

LEGAL
PROCEEDINGS

From time to time, we are subject to claims in legal proceedings
arising in the normal course of our business. We do not believe
that we are party to any pending legal action that could
reasonably be expected to have a material adverse effect on our
business or operating results.

Since June 29, 2005, our Class A common stock has
traded on the New York Stock Exchange under the symbol
NSR. As of February 17, 2009, our Class A
common stock was held by 158 stockholders of record. The
following table sets forth the per-share range of the high and
low sales prices of our Class A common stock as reported on
the New York Stock Exchange for the periods indicated:

High

Low

Fiscal year ended December 31, 2007

First quarter

$

32.96

$

28.03

Second quarter

$

30.76

$

26.60

Third quarter

$

36.30

$

28.58

Fourth quarter

$

36.33

$

27.44

Fiscal year ended December 31, 2008

First quarter

$

30.52

$

21.33

Second quarter

$

28.74

$

21.25

Third quarter

$

25.00

$

18.68

Fourth quarter

$

20.15

$

13.24

There is no established public trading market for our
Class B common stock. As of February 17, 2009, our
Class B common stock was held by 7 stockholders of record.

Dividends

We did not pay any cash dividends on our Class A or
Class B common stock in 2007 or 2008 and we do not expect
to pay any cash dividends on our common stock for the
foreseeable future. We currently intend to retain any

future earnings to finance our operations and growth. Our
revolving credit facility limits our ability to declare or pay
dividends. We are also limited by Delaware law in the amount of
dividends we can pay. Any future determination to pay cash
dividends will be at the discretion of our board of directors
and will depend on earnings, financial condition, operating
results, capital requirements, any contractual restrictions and
other factors that our board of directors deems relevant.

Purchases
of Equity Securities

The following table is a summary of our repurchases of common
stock during each of the three months in the quarter ended
December 31, 2008:

Maximum

Total Number of

Number of Shares

Shares Purchased as

that May Yet Be

Total Number

Average

Part of Publicly

Purchased Under

of Shares

Price Paid

Announced Plans or

the Plans or

Month

Purchased(1)

per Share

Programs

Programs

October 1 through October 31, 2008

725

$

15.18





November 1 through November 30, 2008









December 1 through December 31, 2008

6,481

19.13





Total

7,206

$

18.73





(1)

The number of shares purchased consists of shares of common
stock tendered by employees to us to satisfy the employees
tax withholding obligations arising as a result of vesting of
restricted stock grants under our stock incentive plan. We
purchased these shares for their fair market value on the
vesting date. None of these share purchases were part of a
publicly announced program to purchase our common stock.

The following chart shows how $100 invested in our Class A
common stock on June 29, 2005, the day our Class A
common stock began trading on the New York Stock Exchange, would
have grown through the period ended December 31, 2008,
compared with: (a) $100 invested in the Russell 2000 Index,
and (b) $100 invested in the NYSE TMT Index, each over that
same period. The comparison assumes reinvestment of dividends.
The stock performance in the graph is included to satisfy our
SEC disclosure requirements, and is not intended to forecast or
to be indicative of future performance.

This Performance Graph shall not be deemed to be incorporated by
reference into our SEC filings and shall not constitute
soliciting material or otherwise be considered filed under the
Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.

The tables below present selected consolidated statements of
operations data for each of the five years ended
December 31, 2008 and selected consolidated balance sheet
data as of December 31, 2004, 2005, 2006, 2007 and 2008.
The selected consolidated statements of operations data for each
of the three years ended December 31, 2006, 2007 and 2008,
and the selected consolidated balance sheet data as of
December 31, 2007 and 2008, have been derived from, and
should be read together with, our audited consolidated financial
statements and related notes appearing in this report. The
selected consolidated statements of operations data for each of
the two years ended December 31, 2004 and 2005, and the
selected consolidated balance sheet data as of December 31,
2004, 2005 and 2006, have been derived from our audited
consolidated financial statements and related notes not included
in this report. The share and per share data included in the
selected consolidated statements of operations data for the year
ended December 31, 2004 reflect the 1.4-for-1 split of our
common stock effected as part of the Recapitalization, but do
not reflect other aspects of the Recapitalization.

The following information should be read together with, and is
qualified in its entirety by reference to, the more detailed
information contained in Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7 of this report and our consolidated financial
statements and related notes in Item 8 of this report.

MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

You should read the following discussion and analysis in
conjunction with the information set forth under Selected
Financial Data in Item 6 of this report and our
consolidated financial statements and related notes in
Item 8 of this report. The statements in this discussion
related to our expectations regarding our future performance,
liquidity and capital resources, and other non-historical
statements in this discussion, are forward-looking statements.
These forward-looking statements are subject to numerous risks
and uncertainties, including, but not limited to, the risks and
uncertainties described in Risk Factors in
Item 1A of this report and Business 
Cautionary Note Regarding Forward-Looking Statements in
Item 1 of this report. Our actual results may differ
materially from those contained in or implied by any
forward-looking statements.

Overview

We continued to experience increased demand for our services in
2008, resulting in a 14% increase in revenue over 2007. Under
our contracts to provide telephone number portability services
in the United States, we processed 372.3 million
transactions, a growth of 17% over 2007. In addition, we
continued to see increased demand from enterprises that require
systems capable of handling high volumes of Internet traffic,
which fueled demand for domain name systems service offerings,
especially our Ultra services.

Our results in 2008 were significantly impacted by two goodwill
impairment charges totaling $93.6 million and a long-lived
assets impairment charge of $18.2 million, all of which
related to our NGM business segment. In the fourth quarter of
2008, in response to lower than anticipated adoption rates of
our NGM services and the resulting underperformance of our NGM
business, as well as the manner in which the mobile data market
had evolved and was evolving, we added new leadership and
changed the strategic direction of our NGM business. Associated
with this decision, we began to realign the NGM organization in
December of 2008, and we began development of a new technology
platform that would serve as the common infrastructure for each
of our NGM customers. Though we believe the implementation of
this new strategy for the NGM business will position it well for
long-term success, this repositioning of our NGM business will
result in a delay in market penetration and delayed growth in
end-user adoption rates.

In 2008, our cash flow from operating activities was
$167.6 million, which demonstrates our ability to generate
strong cash flows notwithstanding deteriorating market
conditions, particularly in the second half of the year. The
strength of our business and financial condition enabled us to
use $124.9 million in cash to repurchase shares of our
common stock during the year and still end the year with
$161.7 million in cash, cash equivalents and short-term
investments.

Recent
Developments

On January 28, 2009, we amended our contracts to provide
telephone number portability and other clearinghouse services to
telecommunications service providers in the United States. The
pricing terms under the amended contracts are based on a fixed
fee model rather than a transaction-based model. Specifically,
the amended contracts establish an annual base fee for the
telephone number portability services we provide, which base fee
is subject to an annual price escalator of 6.5%. The amended
contracts also provide for fixed credits in 2009, 2010 and 2011
that are used to calculate the respective annual fixed fee. In
addition, our customers may earn additional credits annually in
2009, 2010 and 2011 if certain levels of aggregate telephone
number inventories are reached and if certain IP fields and
functionality are adopted and implemented. In the event that
transactions in a given year are above or below the established
volume range for that year, the base fee may be adjusted up or
down, respectively, with any such adjustment being applied to
the following years invoices.

We provide the communications industry and enterprise customers
with critical technology services that solve their addressing,
interoperability and infrastructure needs. These services are
used by CSPs and enterprise customers to manage a range of their
technical and operating requirements, including:



Addressing. We enable CSPs and enterprises to
use critical, shared addressing resources, such as telephone
numbers, Internet top-level domain names, and U.S. Common
Short Codes.



Interoperability. We enable CSPs to exchange
and share critical operating data so that communications
originating on one providers network can be delivered and
received on the network of another CSP. We also facilitate order
management and work flow processing among CSPs.



Infrastructure and Other. We enable CSPs to
more efficiently manage changes in their own networks by
centrally managing certain critical data they use to route
communications over their own networks.

We derive a substantial portion of our annual revenue on a
transaction basis, most of which is derived from long-term
contracts.

Our costs and expenses consist of cost of revenue, sales and
marketing, research and development, general and administrative,
and depreciation and amortization.

Cost of revenue includes all direct materials, direct labor, and
those indirect costs related to the generation of revenue such
as indirect labor, materials and supplies and facilities cost.
Our primary cost of revenue is related to personnel costs
associated with service implementation, product maintenance,
customer deployment and customer care, including salaries,
stock-based compensation and other personnel-related expense. In
addition, cost of revenue includes costs relating to developing
modifications and enhancements of our existing technology and
services, as well as royalties paid related to our
U.S. Common Short Code services and registry gateway
services. Cost of revenue also includes our information
technology and systems department, including network costs, data
center maintenance, database management, data processing costs
and facilities costs.

Sales and marketing expense consists of personnel costs, such as
salaries, sales commissions, travel, stock-based compensation,
and other personnel-related expense; costs associated with
attending and sponsoring trade shows; costs of computer and
communications equipment and support services; facilities costs;
consulting fees; costs of marketing programs, such as Internet
and print, including product branding, market analysis and
forecasting; and customer relationship management.

Research and development expense consists primarily of personnel
costs, including salaries, stock-based compensation and other
personnel-related expense; consulting fees; and the costs of
facilities, computer and support services used in service and
technology development.

General and administrative expense consists primarily of
personnel costs, including salaries, stock-based compensation,
and other personnel-related expense, for our executive,
administrative, legal, finance and human resources functions.
General and administrative expense also includes facilities,
support services and professional services fees.

Depreciation and amortization relates to amortization of
identifiable intangibles, and the depreciation of our property
and equipment, including our network infrastructure and
facilities related to our services.

Critical
Accounting Policies and Estimates

The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles, or
U.S. GAAP. The preparation of these financial statements in
accordance with U.S. GAAP requires us to utilize accounting
policies and make certain estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure
of contingencies as of the date of the financial statements and
the reported amounts of revenue and expense during a fiscal
period. The Securities and Exchange Commission considers an
accounting policy to be critical if it is important to a
companys financial condition and results of operations,
and if it requires significant judgment and estimates on the
part of management in its application. We have discussed the
selection

and development of the critical accounting policies with the
audit committee of our board of directors, and the audit
committee has reviewed our related disclosures in this report.
Although we believe that our judgments and estimates are
appropriate and correct, actual results may differ from those
estimates.

We believe the following to be our critical accounting policies
because they are important to the portrayal of our financial
condition and results of operations and they require critical
management judgments and estimates about matters that are
uncertain. If actual results or events differ materially from
those contemplated by us in making these estimates, our reported
financial condition and results of operation for future periods
could be materially affected. See Item 1A of this report,
Risk Factors, for certain matters that may bear on
our future results of operations.

Revenue
Recognition

Our revenue recognition policies are in accordance with
Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition. We
provide the following services pursuant to various private
commercial and government contracts.

Addressing. Our addressing services include
telephone number administration, implementing the allocation of
pooled blocks of telephone numbers, directory services for
Internet domain names and U.S. Common Short Codes, and
internal and external managed domain name services. We generate
revenue from our telephone number administration services under
two government contracts. Under our contract to serve as the
North American Numbering Plan Administrator, we earn a fixed
annual fee and recognize this fee as revenue on a straight-line
basis as services are provided. Under our contract to serve as
the National Pooling Administrator, we earn a fixed fee
associated with administration of the pooling system plus
reimbursement for costs incurred. We recognize revenue for this
contract based on costs incurred plus a pro rata amount of the
fixed fee. In the event we estimate losses on our fixed-fee
contracts, we recognize these losses in the period in which a
loss becomes apparent.

In addition to the administrative functions associated with our
role as the National Pooling Administrator, we also generate
revenue from implementing the allocation of pooled blocks of
telephone numbers under our long-term contracts with North
American Portability Management LLC, and we recognize revenue on
a per transaction fee basis as the services are performed. For
our Internet domain name services, we generate revenue for
Internet domain registrations, which generally have contract
terms between one and ten years. We recognize revenue on a
straight-line basis over the lives of the related customer
contracts.

We generate revenue through internal and external managed domain
name services. Our revenue consists of customer
set-up fees,
monthly recurring fees and per transaction fees for transactions
in excess of pre-established monthly minimums under contracts
with terms ranging from one to three years. Customer
set-up fees
are not considered a separate deliverable and are deferred and
recognized on a straight-line basis over the term of the
contract. Under our contracts to provide our managed domain name
services, customers have contractually established monthly
transaction volumes for which they are charged a recurring
monthly fee. Transactions processed in excess of the
pre-established monthly volume are billed at a contractual per
transaction rate. Each month we recognize the recurring monthly
fee and usage in excess of the established monthly volume on a
per transaction basis as services are provided. We also generate
revenue from one-time project fees, which are recognized over
the contract term. We generate revenue from our U.S. Common
Short Code services under short-term contracts ranging from
three to twelve months, and we recognize revenue on a
straight-line basis over the term of the customer contracts.

Interoperability. Our interoperability
services consist primarily of wireline and wireless number
portability and order management services. We generate revenue
from number portability under our long-term contracts with North
American Portability Management LLC and Canadian LNP Consortium
Inc. We recognize revenue on a per transaction fee basis as the
services are performed. We provide order management services
consisting of customer
set-up and
implementation followed by transaction processing under
contracts with terms ranging from one to three years. Customer
set-up and
implementation is not considered a separate deliverable;
accordingly, the fees are deferred and recognized as revenue on
a straight-line basis over the term of the contract. Per
transaction fees are recognized as the transactions are
processed. We generate revenue from our inter-carrier mobile
instant messaging services under contracts with mobile operators
that range from one to three years. These contracts consist of
license

fees based on the number of subscribers that use mobile instant
messaging services, as well as fees for
set-up and
implementation. We recognize license fee revenue ratably over
the term of the contract after completion of customer
set-up and
implementation. Customer
set-up and
implementation is not considered a separate deliverable;
accordingly, the fees are deferred and recognized as revenue on
a straight line basis over the remaining term of the contract
following delivery of the
set-up and
implementation services.

Infrastructure and Other. Our infrastructure
services consist primarily of network management and connection
services. We generate revenue from network management services
under our long-term contracts with North American Portability
Management LLC. We recognize revenue on a per transaction fee
basis as the services are performed. In addition, we generate
revenue from connection fees and system enhancements under our
contracts with North American Portability Management LLC. We
recognize our connection fee revenue as the service is
performed. System enhancements are provided under contracts in
which we are reimbursed for costs incurred plus a fixed fee.
Revenue is recognized based on costs incurred plus a pro rata
amount of the fee. We generate revenue from our intra-carrier
mobile instant messaging services under contracts with mobile
operators that range from one to three years. These contracts
consist of license fees based on the number of subscribers that
use mobile instant messaging services, as well as fees for
set-up and
implementation. We recognize license fee revenue ratably over
the term of the contract after completion of customer
set-up and
implementation. Customer
set-up and
implementation is not considered a separate deliverable;
accordingly, the fees are deferred and recognized as revenue on
a straight line basis over the remaining term of the contract
following delivery of the
set-up and
implementation services.

Significant
Contracts

We provide wireline and wireless number portability, implement
the allocation of pooled blocks of telephone numbers and provide
network management services pursuant to seven contracts with
North American Portability Management LLC, an industry group
that represents all telecommunications service providers in the
United States. We recognize revenue under our contracts with
North American Portability Management LLC primarily on a per
transaction basis. The aggregate fees for transactions processed
under these contracts are determined by the total number of
transactions, and these fees are billed to telecommunications
service providers based on their allocable share of the total
transaction charges. This allocable share is based on each
respective telecommunications service providers share of
the aggregate end-user services revenue of all
U.S. telecommunications service providers, as determined by
the FCC. Under our contracts, we also bill a Revenue Recovery
Collections, or RRC, fee of a percentage of monthly billings to
our customers, which is available to us if any
telecommunications service provider fails to pay its allocable
share of total transactions charges. If the RRC fee is
insufficient for that purpose, these contracts also provide for
the recovery of such differences from the remaining
telecommunications service providers.

The per transaction pricing under these contracts provided for
annual volume-based credits that were earned on all transactions
in excess of the pre-determined annual volume threshold. For
2006, the maximum aggregate volume-based credit was
$7.5 million, which was applied via a reduction in per
transaction pricing once the pre-determined annual volume
threshold was surpassed. When the aggregate credit was fully
satisfied, the per transaction pricing was restored to the
prevailing contractual rate. In 2006 the pre-determined annual
transaction volume threshold under the contract was exceeded,
which resulted in the issuance of $7.5 million of
volume-based credits for 2006. No volume-based credits were
applied in 2007 and 2008 as a result of amendments to our
contracts with North American Portability Management LLC in
September 2006.

In 2007, pricing under our contracts with North American
Portability Management LLC was $0.91 per transaction regardless
of transaction volume. Beginning January 1, 2008, per
transaction pricing was derived on a straight-line basis using
an effective rate calculation formula based on annualized
transaction volume between 200 million and
587.5 million. For annualized transaction volumes less than
or equal to 200 million, the per transaction price is equal
to a flat rate of $0.95 per transaction. For annualized volumes
greater than or equal to 587.5 million, the per transaction
price is equal to a flat rate of $0.75 per transaction. For the
year ended December 31, 2008, the weighted average per
transaction price was $0.86.

Pursuant to certain of our private commercial contracts, we are
subject to service level standards and to corresponding
penalties for failure to meet those standards. We record a
provision for these performance-related penalties when we become
aware that required service levels that would trigger such a
penalty have not been met, which results in a corresponding
reduction of our revenue.

For more information regarding how we recognize revenue for each
of our service categories, please see the discussion above under
 Revenue Recognition.

Restructuring

In December 2008, we announced a restructuring plan for our NGM
business segment, involving the termination of certain
employees, and reduction in or closure of leased facilities in
some of our international locations. As a result, we incurred
$1.2 million in severance related costs and
$0.5 million in lease and facilities exit costs for the
year ended December 31, 2008. These restructuring costs
include estimated costs for net lease expense for facilities
that are no longer being used. The provision is equal to the
present value of the minimum future lease payments under our
contractual lease obligations, offset by the present value of
the estimated sublease payments that we may receive. As of
December 31, 2008, our accrued restructuring liability was
$3.5 million, including $1.8 million and
$1.7 million of liabilities relating to our Clearinghouse
and NGM segments, respectively. The total minimum lease payments
for restructured facilities are $2.3 million, net of
anticipated sublease payments. These lease payments will be made
over the remaining lives of the relevant leases, which range
from six months to four years. If actual market conditions are
different than those we have projected, we will be required to
recognize additional restructuring costs or benefits associated
with these facilities.

Goodwill

We have made numerous acquisitions, including the 2006
acquisitions of UltraDNS Corporation and Followap Inc.,
resulting in our recording of goodwill, which represents the
excess of the purchase price over the fair value of assets
acquired, as well as other definite-lived intangible assets. In
accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, or
SFAS No. 142, goodwill and indefinite-lived intangible
assets are not amortized, but are reviewed for impairment upon
the occurrence of events or changes in circumstances that would
reduce the fair value of such assets below their carrying
amount. Goodwill is required to be tested for impairment at
least annually, or on an interim basis if circumstances change
that would indicate the possibility of impairment. For purposes
of our annual impairment test, we have identified and assigned
goodwill to two reporting units, our Clearinghouse reporting
unit and our NGM reporting unit.

Goodwill is tested for impairment at the reporting unit level
using a two-step approach. The first step is to compare the fair
value of a reporting units net assets, including assigned
goodwill, to the book value of its net assets, including
assigned goodwill. Fair value of the reporting unit is
determined using both an income approach and market approach. To
assist in the process of determining whether a goodwill
impairment exists, we perform internal valuation analyses and
consider other market information that is publicly available,
and we may obtain appraisals from external advisors. If the fair
value of the reporting unit is greater than its net book value,
the assigned goodwill is not considered impaired. If the fair
value is less than the reporting units net book value, we
perform a second step to measure the amount of the impairment,
if any. If required, the second step involves a comparison of
the book value of the reporting units assigned goodwill to
the implied fair value of the reporting units goodwill,
using a theoretical purchase price allocation based on this
implied fair value, in order to determine the magnitude of the
impairment. If we determine that an impairment has occurred, we
are required to record a write-down of the carrying value and
charge the impairment as an operating expense in the period the
determination is made.

The annual goodwill impairment test, any required interim
goodwill impairment test and the related determination of the
fair value of reporting units and intangible assets each involve
the use of significant estimates and assumptions by management,
and are inherently subjective. In particular, for each of our
reporting units, the significant assumptions used to determine
fair value include market penetration, anticipated growth rates,
and risk-adjusted discount rates for the income approach, as
well as the selection of comparable companies and comparable
transactions for the market approach. Changes in estimates and
assumptions could have

a significant impact on whether or not an impairment charge is
recognized and also the magnitude of any such charge. Moreover,
for our NGM reporting unit, due to the early stage of its
operations and the emerging nature of mobile instant messaging
technology, the assumptions and estimates used by management
that are incorporated within the NGM reporting unit valuation
have a high degree of subjectivity, and are thus more likely to
change over time. In addition, because relatively few carriers
control a substantial portion of the end users who will drive
the success of mobile instant messaging, the activities of
NGMs largest customers can have a significant impact on
these assumptions and estimates.

The impact of a change in assumptions in the context of our
goodwill impairment testing may be material. For example, in
2008, changes to our key assumptions in determining the fair
value of our NGM reporting unit resulted in two goodwill
impairment charges. Specifically, late in the first quarter of
2008, there were changes in the market and identified
customer-related events that caused us to change certain of our
assumptions underlying the financial forecast relating to NGM,
most notably our assumptions about end-user adoption rates.
Projections of future cash flows for the NGM business are
particularly sensitive to these assumptions. As a result, when
the events of the first quarter caused us to reduce our
projections relating to the rate at which new end users would
begin using mobile instant messaging, those changed assumptions
had a dramatic impact on our financial forecast for that
business and the estimated fair value of our NGM business. As a
result, we recorded a $29.0 million impairment charge in
the first quarter of the 2008 fiscal year.

In the fourth quarter of 2008, in response to lower than
anticipated adoption rates and the resulting underperformance of
our NGM business, as well as the manner in which the mobile data
market had evolved and was evolving, we added new leadership and
conducted a strategic evaluation of our NGM business. The goal
of this strategic evaluation was to position NGM for future
long-term success in the mobile instant messaging market. During
the course of this evaluation, we conducted a thorough review of
the NGM business, including our experience in the mobile instant
messaging market since our acquisition of Followap Inc. in
November 2006, the current state of the mobile instant messaging
market and related markets, the performance of our competitors
for these services and consumer demand. Following this
evaluation, we decided to change the direction of our NGM
business to offer enhanced end user experiences, faster
deployments, and greater operator control, all of which would be
delivered from a common infrastructure. Associated with this
decision, we began to realign the NGM organization, and we
announced a restructuring plan in December 2008 to leverage our
existing operational resources to support our NGM initiatives.
In addition, consistent with our new strategic direction, we
began development of a new technology platform that would serve
as the common infrastructure for each of our NGM customers. This
repositioning of our NGM business will result in a delay in
market penetration and delayed growth in end user adoption
rates. At the same time, the NGM business will require continued
investment and we will continue to experience net cash outflows
until that market penetration and growth occurs. The revisions
to the financial forecast to reflect this new strategic
direction resulted in a decline in the estimated fair value of
the NGM business. As a result, we recorded an additional
goodwill impairment charge of $64.6 million in the fourth
quarter of 2008.

The key assumptions used in our annual goodwill impairment test
to determine the fair value of the NGM reporting unit included:
(a) cash flow projections, which include growth assumptions
for forcasted revenue and expenses; (b) a terminal multiple
of 7.5 times based upon the expected proceeds resulting from a
sale of the NGM business unit at the end of the cash flow
projection period; (c) a discount rate of 45%, which was
based upon the NGM business units weighted cost of capital
adjusted for the risks associated with the operations at the
time of the annual goodwill impairment test; (d) selection
of comparable companies and transactions used in the market
approach; and (e) our assumptions in weighting the results
of the discounted cash flow approach, income approach and market
approach valuation techniques. A variance in these assumptions
could have a significant effect on the amount of the goodwill
impairment charge recorded.

The fair value of our NGM reporting unit was determined to be
less than its carrying value as of the annual impairment date.
As a result, we performed a step two analysis to compute the
amount of the impairment by determining an implied fair
value of goodwill. The determination of our NGM reporting
units implied fair value of goodwill requires
us to allocate the estimated fair value of our NGM reporting
unit to the assets and liabilities of our NGM reporting unit.
Any unallocated fair value represents the implied fair
value of goodwill, which is then compared to its
corresponding carrying value. We considered the fair value of
our assets and

liabilities, including technology assets and customer
relationships, and the appropriate treatment of deferred tax
balances.

We believe that the assumptions and estimates used to determine
the estimated fair values of each of our reporting units are
reasonable; however, these estimates are inherently subjective,
and there are a number of factors, including factors outside of
the our control, that could cause actual results to differ from
our estimates. For example, with respect to our NGM business,
our assumptions could change due to further delays resulting
from changes in strategy by participants in the mobile instant
messaging market, lack of effective marketing efforts to promote
mobile instant messaging to end users, unforeseen changes in the
market or otherwise. Any changes to our key assumptions about
our businesses and our prospects, or changes in market
conditions, could result in an additional impairment charge.
Such a charge could have a material effect on our consolidated
financial statements because of the significance of goodwill and
intangible assets to our consolidated balance sheet. As of
December 31, 2008, we had $95.7 million and
$22.3 million, respectively, in goodwill for our
Clearinghouse reporting unit and our NGM reporting unit, subject
to future impairment tests.

Impairment
of Long-Lived Assets

Our long-lived assets primarily consist of property and
equipment and intangible assets. In accordance with Statement of
Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, or
SFAS No. 144, we review long-lived assets and certain
identifiable intangibles for impairment whenever events or
changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be
generated by the assets. Recoverability measurement and
estimation of undiscounted cash flows is done at the lowest
possible level for which there is an identifiable asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of assets exceeds the fair value of the assets. Assets to
be disposed of are recorded at the lower of the carrying amount
or fair value less costs to sell. Management must exercise
judgment in determining whether an event has occurred that may
impair the value of the long-lived assets. Factors that could
indicate that impairment may exist include significant
underperformance relative to a plan or long-term projections,
significant changes in business strategy, significant negative
industry or economic trends or a significant decline in our
stock price or in the value of our reporting units for a
sustained period of time.

During the fourth quarter of 2008, we made the determination
that our strategic decision to reposition the NGM business and
the resulting change in our projected results served as an
indicator of impairment for long-lived assets in our NGM
business reporting unit. We performed a recoverability test,
determined that the fair value of these long-lived assets was
less than the carrying value, and recorded an $18.2 million
charge for impairment of long-lived assets, the largest
component of which consisted of technology and customer
relationships. In determining fair value, we utilized valuation
models that involved assumptions about future cash flows, future
operating plans, discount rates and, as appropriate, review of
market comparables. We believe that the assumptions and
estimates used to determine the estimated fair values of our
long-lived assets are reasonable; however, there are a number of
factors, including factors outside of the our control, that
could cause actual results to differ from our assumptions and
estimates. Moreover, assumptions and estimates used by
management that are incorporated within the valuation of
NGMs long-lived assets have a higher degree of
subjectivity and are more likely to change over time.

As a result of the strategic repositioning of our NGM business
and the resulting change in our financial forecast, all of which
is described above under the heading Critical Accounting
Policies  Goodwill, we recorded an impairment
of long-lived assets specific to our NGM reporting unit of
$18.2 million during the fourth quarter of 2008. As of
December 31, 2008, we had $61.7 million and
$19.1 million, respectively, in long-lived assets for our
Clearinghouse reporting unit and our NGM reporting unit.

Accounts receivable are recorded at the invoiced amount and do
not bear interest. In accordance with our contracts with North
American Portability Management LLC, we bill a RRC fee of a
percentage of monthly billings to our customers. The aggregate
RRC fees collected may be used to offset uncollectible
receivables from an

individual customer. Beginning July 1, 2005, the RRC fee
was 1% of monthly billings. On July 1, 2008, the RRC fee
was reduced to 0.75%. Any accrued RRC fees in excess of
uncollectible receivables are paid back to the customers
annually on a pro rata basis. All other receivables related to
services not covered by the RRC fees are evaluated and, if
deemed not collectible, are appropriately reserved.

Investments

We have approximately $41.7 million par value in
investments related to auction rate securities, or ARS, all of
which are classified as noncurrent at December 31, 2008.
For each of our ARS at December 31, 2008, we determined the
fair value using discounted cash flow and market comparables
methods. The discounted cash flow valuation method involves
managements judgment and assumptions regarding discount
rates, coupon rates, and estimated maturity for each of the ARS.
The market comparables valuation method involves
managements judgment regarding the selection of comparable
securities and transactions in a secondary market. Based on the
results of our assessments, we recorded losses of
$10.6 million for the year ended December 31, 2008 to
reduce the value of our ARS. If we use different assumptions and
judgments in our valuations or the credit rating of either the
security issuer or the third-party insurer underlying the
investments deteriorates, we may be required to adjust the
carrying value of our ARS through additional charges in current
period earnings. As of December 31, 2008, our ARS
investment balance subject to future fluctuations in fair value
is approximately $31.1 million.

In November 2008, we accepted a settlement offer in the form of
a rights offering from the investment firm that brokered the
original purchases of the $41.7 million par value of ARS,
which provides us with the right to sell these securities at par
value to the investment firm during a period beginning on
June 30, 2010. Because the settlement agreement is a
legally enforceable firm commitment, the rights are recognized
as a financial asset at fair value in our financial statements
at December 31, 2008, and accounted for separately from the
associated securities. We have elected to measure the rights at
their fair value pursuant to SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115, or
SFAS 159, and subsequent changes in fair value will also be
recognized in current period earnings. Because we intend to
exercise the rights in June 2010, we do not have the intent to
hold the associated auction rate securities until recovery or
maturity. We have classified the ARS as trading securities
pursuant to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, or SFAS
No. 115, which requires changes in the fair value of these
securities to be recorded in current period earnings, which we
believe will substantially offset changes in the fair value of
the rights. We determined the fair value of the rights using a
discounted cash flow method which involves judgment and
assumptions regarding the timing of cash flows, fair value of
the underlying ARS and the ability of the investment firm to
disburse the cash anticipated in the ARS rights offering. Based
upon our assessment of the fair value of the rights, we recorded
a gain of approximately $9.4 million for the year ended
December 31, 2008 in interest and other income in our
statement of operations.

We have approximately $13.1 million par value in
investments related to a cash reserve fund which is closed to
new investments and subject to immediate redemptions. The fund
currently has a projected schedule that will result in
approximately 90 to 95 percent of the fund to be redeemed
in 2009. Because there is little or no market data, the fair
value of the securities within the cash reserve fund was
determined using pricing models that utilize recent trades for
securities in active markets and dealer quotes for securities
considered to be inactive, as well as contractual terms,
maturity and assumptions about liquidity. As of
December 31, 2008, our cash reserve fund balance subject to
future fluctuations in fair value was approximately
$10.8 million. For the year ended December 31, 2008,
we recorded other-than-temporary losses of $2.3 million
related to these securities held at December 31, 2008.

Income
Taxes

We recognize deferred tax assets and liabilities based on
temporary differences between the financial reporting bases and
the tax bases of assets and liabilities. These deferred tax
assets and liabilities are measured using the enacted tax rates
and laws that will be in effect when such amounts are expected
to reverse or be utilized. The realization of deferred tax
assets is contingent upon the generation of future taxable
income. When appropriate, we recognize a valuation allowance to
reduce such deferred tax assets to amounts that are more likely
than not to be ultimately realized. The calculation of deferred
tax assets, including valuation allowances, and liabilities
requires us

to apply significant judgment related to such factors as the
application of complex tax laws, changes in tax laws and our
future operations. We review our deferred tax assets on a
quarterly basis to determine if a valuation allowance is
required based upon these factors. Changes in our assessment of
the need for a valuation allowance could give rise to a change
in such allowance, potentially resulting in additional expense
or benefit in the period of change.

Income tax provision includes U.S. federal, state, local
and foreign income taxes and is based on pre-tax income or loss.
The provision or benefit for income taxes is based upon our
estimate of our annual effective income tax rate. In determining
the estimated annual effective income tax rate, we analyze
various factors, including projections of our annual earnings
and taxing jurisdictions in which the earnings will be
generated, the impact of state and local income taxes and our
ability to use tax credits and net operating loss carryforwards.

In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109, or
FIN 48, which clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with SFAS No. 109.
FIN 48 is effective for fiscal years beginning after
December 15, 2006, and was adopted by us on January 1,
2007. FIN 48 provides a two-step approach to recognize and
measure tax benefits when the benefits realization is
uncertain. The first step is to determine whether the benefit is
to be recognized; the second step is to determine the amount to
be recognized. Income tax benefits should be recognized when,
based on the technical merits of a tax position, the entity
believes that if a dispute arose with the taxing authority and
were taken to a court of last resort, it is more likely than not
(i.e., a probability of greater than 50 percent)
that the tax position would be sustained as filed. If a position
is determined to be more likely than not of being sustained, the
reporting enterprise should recognize the largest amount of tax
benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with the taxing authority. The
cumulative effect of applying the provisions of FIN 48 upon
adoption is to be reported as an adjustment to beginning
retained earnings. Our practice is to recognize interest and
penalties related to income tax matters in income tax expense.

Tax years 2005 through 2007 remain open to examination by the
major taxing jurisdictions to which we are subject. The Internal
Revenue Service, or IRS, has initiated an examination of our
federal income tax returns for the years 2005 and 2006. We
anticipate that the examination will be completed within the
next twelve months. While the outcome of the audit is uncertain,
we do not currently believe that the outcome will have a
material adverse effect on our financial position, results of
operations or cash flows.

Stock-Based
Compensation

We recognize share-based compensation expense in accordance with
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payments, or SFAS No. 123(R), as
interpreted by SEC Staff Accounting Bulletin No. 107,
Share-Based Payment, or SAB 107. SFAS
No. 123(R) requires the measurement and recognition of
compensation expense for share-based awards based on estimated
fair values on the date of grant. We estimate the fair value of
each option-based award on the date of grant using the
Black-Scholes option-pricing model. This option pricing model
requires that we make several estimates, including the
options expected life and the price volatility of the
underlying stock. The expected life of options represents the
weighted average period the stock options are expected to remain
outstanding. Volatility is a measure of the amount by which a
financial variable such as a share price has fluctuated, or
historical volatility, and is expected to fluctuate, or expected
volatility, during a period. Given our limited historical stock
data since our initial public offering in June 2005, we consider
the implied volatility and historical volatility of our stock
price in determining our expected volatility.

Because share-based compensation expense is based on awards that
are ultimately expected to vest, the amount of expense takes
into account estimated forfeitures. SFAS No. 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Changes in these
estimates and assumptions can materially affect the measure of
estimated fair value of our share-based compensation. See
Note 15 to our Consolidated Financial Statements in
Item 8 of Part II of this report for information
regarding our assumptions related to share-based compensation
and the amount of share-based compensation expense we incurred
for the periods covered in this report. As of December 31,
2008, total unrecognized compensation expense was
$23.7 million, which relates to unvested stock options,
unvested restricted

stock units, unvested restricted stock and unvested performance
vested restricted stock units, and is expected to be recognized
over a weighted-average period of 1.9 years.

We estimate the fair value of our restricted stock unit awards
based on the fair value of our common stock on the date of
grant. Our outstanding restricted stock unit awards are subject
to service-based vesting conditions
and/or
performance-based vesting conditions. We recognize the estimated
fair value of service-based awards, net of estimated
forfeitures, as share-based expense ratably over the vesting
period on a straight-line basis. Awards with performance-based
vesting conditions require the achievement of specific financial
targets at the end of the specified performance period and the
employees continued employment. We recognize the estimated
fair value of performance-based awards, net of estimated
forfeitures, as share-based expense over the performance period,
which considers each performance period or tranche separately,
based upon our determination of whether it is probable that the
performance targets will be achieved. At each reporting period,
we reassess the probability of achieving the performance targets
and the performance period required to meet those targets.
Determining whether the performance targets will be achieved
involves judgment, and the estimate of stock-based compensation
expense may be revised periodically based on changes in the
probability of achieving the performance targets. Revisions are
reflected in the period in which the estimate is changed. If any
performance goals are not met, no compensation cost is
ultimately recognized against that goal, and, to the extent
previously recognized, compensation cost is reversed. Based upon
our assessment in the fourth quarter of 2008 of the probability
of achieving specific financial targets related to our
performance vested restricted stock units, we revised our
estimate of achievement from 125% of target to 50% of target.
The change in this assumption resulted in a reversal of
approximately $3.0 million in compensation expense in the
fourth quarter of 2008. Our consolidated net income for the year
ended December 31, 2008 was $4.3 million and diluted
earnings per share was $0.06 per share. As a result of this
change in estimate, the as adjusted net income would have been
approximately $1.6 million and the as adjusted diluted
earnings per share would have been approximately $0.02 per share
had we continued to use the previous estimate of 125% of the
performance target. Further changes in our assumptions regarding
the achievement of specific financial targets could have a
material effect on our consolidated financial statements.

Acquisitions

We have expanded the scope of our services and increased our
customer base through selective acquisitions. Our objective for
each acquisition was to expand the scope of the services that we
provide and to leverage our clearinghouse capabilities in order
to maximize efficiency and provide added value to our customers.

UltraDNS
Corporation

On April 21, 2006, we acquired UltraDNS Corporation
for $61.8 million in cash and acquisition costs of
$0.8 million. The acquisition further expanded our domain
name services and our Internet protocol technologies. The
acquisition was accounted for as a purchase business combination
in accordance with SFAS No. 141, Business
Combinations, or SFAS No. 141. Of the total cash
consideration, approximately $6.1 million was distributed
to an escrow account for indemnification claims as set forth in
the acquisition agreement. Funds remaining in the account were
distributed to the former stockholders of UltraDNS in accordance
with the acquisition agreement following the first anniversary
of the acquisition.

Of the total purchase price, $8.5 million has been
allocated to net tangible assets acquired and $20.0 million
has been allocated to definite-lived intangible assets acquired.
The income approach, which includes an analysis of cash flows
and the risks associated with achieving such cash flows, was the
primary technique utilized in valuing the identifiable
intangible assets. The $20.0 million of definite-lived
intangible assets acquired consists of the value assigned to
UltraDNSs direct customer relationships of
$14.7 million, web customer relationships of
$0.3 million, acquired technology of $4.8 million, and
trade names of $0.2 million. We are amortizing the value of
the UltraDNS direct and web customer relationships in proportion
to the respective discounted cash flows over an estimated useful
life of 7 and 5 years, respectively. Both acquired
technology and trade names are being amortized on a
straight-line basis over 3 years.

Followap
Inc.

On November 27, 2006, we acquired Followap Inc. for
$139.0 million in cash and acquisition costs of
$1.8 million along with the assumption and payment of
certain Followap debt and other liabilities of
$5.6 million.

The acquisition further expanded our Internet protocol
technologies, which is a key strategic initiative for us. The
acquisition was accounted for as a purchase business combination
in accordance with SFAS No. 141. Of the total cash
consideration, approximately $14.1 million was distributed
to an escrow account for indemnification claims as set forth in
the acquisition agreement. The acquisition agreement provides
that, following the first anniversary of the acquisition and the
resolution of any pending claims, all funds remaining in the
account will be distributed to the former stockholders and
optionholders of Followap in accordance with the acquisition
agreement.

Of the total purchase price, $0.2 million has been
allocated to net tangible liabilities assumed and
$30.6 million has been allocated to definite-lived
intangible assets acquired. The income approach, which includes
an analysis of cash flows and the risks associated with
achieving such cash flows, was the primary technique utilized in
valuing the identifiable intangible assets. The
$30.6 million of definite lived intangible assets acquired
consists of the value assigned to Followaps customer
relationships of $20.8 million and acquired technology of
$9.8 million. We are amortizing the value of the Followap
customer relationships using an accelerated basis over
5 years and the value of the acquired technology on a
straight-line basis over 3 years. During 2008, we recorded
impairment charges to write down the carrying value of the NGM
reporting units goodwill and long-lived assets.

I-View.com,
Inc. (d/b/a MetaInfo)

On January 8, 2007, we acquired certain assets of
I-View.com, Inc. (d/b/a MetaInfo) for cash consideration of
$1.7 million. The acquisition of MetaInfo expanded our
enterprise DNS services. The acquisition was accounted for as a
purchase business combination in accordance with
SFAS No. 141 and the results of operations of MetaInfo
have been included in the accompanying consolidated statement of
operations since the date of acquisition. Of the total purchase
price, we allocated $0.1 million to net tangible
liabilities assumed, $0.5 million to definite-lived
intangible assets and $1.3 million to goodwill.
Definite-lived intangible assets consist of customer intangibles
and acquired technology. We are amortizing the value of the
customer intangibles in proportion to the discounted cash flows
over an estimated useful life of 3 years. Acquired
technology is being amortized on a straight-line basis over
3 years.

Webmetrics,
Inc.

On January 10, 2008, we acquired Webmetrics, Inc. for cash
consideration of $12.5 million, subject to certain purchase
price adjustments and contingent cash consideration of up to
$6.0 million, and acquisition costs of approximately
$685,000. The acquisition of Webmetrics, a provider of web and
network performance testing, monitoring and measurement
services, expanded our Internet and infrastructure services. The
acquisition was accounted for as a purchase business combination
in accordance with SFAS No. 141 and the results of
operations of Webmetrics have been included in the accompanying
consolidated statement of operations since the date of
acquisition. Of the total purchase price, a preliminary estimate
of $0.4 million has been allocated to net tangible assets
acquired, $6.4 million to definite-lived intangible assets
and $7.2 million to goodwill. Definite-lived intangible
assets consist of customer relationships and acquired
technology. We are amortizing the value of the customer
relationships in proportion to the discounted cash flows over an
estimated useful life of 3 years. Acquired technology is
being amortized on a straight-line basis over 5 years. In
2008, we recorded $1.2 million in purchase price
adjustments to goodwill as a result of earnout installments in
accordance with the purchase agreement.

Current
Trends Affecting Our Results of Operations

In 2008, in the face of turbulent economic conditions, we
experienced overall increased demand for our services and
solutions despite lower than anticipated demand for our NGM
services. In particular, we experienced increased demand for our
telephone number portability services in the United States, our
expanded range of DNS services and the use of U.S. Common
Short Codes.

In January 2009, we amended our seven regional contracts with
North American Portability Management LLC under which we provide
telephone number portability and other clearinghouse services to
CSPs in the United States. The amendments provide for an annual,
fixed-fee associated with the telephone number portability
services we provide, which is subject to an annual price
escalator. The fixed fee is subject to adjustment in limited
circumstances, including an upward or downward adjustment in the
event that the volume of transactions in a given year is above
or below a contractually established volume range for that year,
respectively. If any such adjustment is

triggered, it would be applied in the following year. We believe
that, as the industry continues to evolve and become more
complex and as new technologies continue to proliferate, we will
experience continued demand for our addressing, interoperability
and infrastructure services. We also believe the amendments to
these contracts should facilitate the use of new services by the
industry to enable IP routing of Voice, Short Messaging Text,
and Multi-media messaging Moreover, as our customers begin to
rely on us to implement
IP-based
communications, we believe that we will have opportunities for
future growth from ancillary directory services.

We continued to see increased demand during 2008 for our
addressing services from enterprises that require systems
capable of handling high volumes of Internet traffic. This
demand was a primary driver of revenue growth for our domain
name services, particularly Ultra services. We believe that
enterprise customers will continue to increase their reliance on
the Internet and their DNS-based systems to run their
businesses, which will, in turn, increase their reliance on our
services, and enable us to increase the scope of services that
we provide to these customers and attract new customers that
require reliable and scalable DNS services.

The revenue we recognized from our NGM services has not grown at
the rates we anticipated when we acquired Followap in November
2006. Consequently, at the end of 2008, we repositioned our NGM
business so that we could offer enhanced end user experiences,
faster deployments, greater operator control and a common
infrastructure. In addition, we began to implement cost cutting
measures at NGM to bring our spending to a level that is
consistent with demand, while solidifying our position as a key
provider of infrastructure that will enable mobile carriers to
offer mobile instant messaging and new features and
functionalities to their end users.

Though the amendment of our contracts to provide telephone
number portability services in the United States provides
enhanced predictability for a substantial portion of our total
revenue, the impact of the current macroeconomic and industry
conditions on our organization as a whole is unclear. During
this period of uncertainty, we intend to balance our strategy of
continued investment for the long-term with careful management
of our workforce and operating costs. Overall, our focus is to
manage our business to provide strong profitability and cash
flows.

Total revenue. Total revenue increased
$59.7 million due primarily to increases in infrastructure
transactions under our contracts to provide telephone number
portability services in the United States, our expanded range of
DNS services, and growth in the use of U.S. Common Short
Codes.

Addressing. Addressing revenue increased
$20.9 million due to the expanded range of DNS services we
offer and the continued increase in the use of U.S. Common
Short Codes. Specifically, revenue from DNS services increased
$17.4 million, consisting of a $13.0 million increase
in revenue from our NeuStar Ultra services due to increased
demand from customers who rely on us to manage their
increasingly complex DNS requirements and a $4.4 million
increase in revenue due to an increased number of domain names
under management. In addition, revenue from U.S. Common
Short Codes increased $5.5 million due to an increased
number of codes under management. These increases were offset by
a decrease of $1.7 million in revenue under our contracts
to provide telephone number portability services in the United
States.

Interoperability. Interoperability revenue
increased $2.6 million. Our Clearinghouse business segment
revenue decreased $3.6 million, offset by a
$6.2 million increase attributable to our NGM business
segment. Clearinghouse revenue decreased primarily due to a
decrease in revenue of $2.6 million under our contracts to
provide telephone number portability services in the United
States due to decreased competitive churn and lower annual
average price per transaction. In addition, our revenue from
telephone number portability services in Canada decreased
$4.8 million resulting from a return to normal use patterns
in 2008 as compared to the elevated transaction levels we
experienced in early 2007 in advance of the introduction of
wireless number portability in Canada. These decreases were
offset by a $4.4 million increase in revenue from our order
management services. The increase in NGM business segment
revenue of $6.2 million was driven by an increase in the
number of end users utilizing our services.

Infrastructure and other. Infrastructure and
other revenue increased $36.1 million, of which
$35.8 million was attributable to our Clearinghouse
business segment and $0.3 million was attributable to our
NGM business segment. Clearinghouse revenue increased primarily
due to increased demand for our network management services,
principally due to customers making changes to their networks
that required actions such as disconnects and modifications to
network elements. We believe these changes were driven largely
by trends in the industry, including the implementation of new
technologies by our customers, such as wireless technology
upgrades and network optimization. In addition, infrastructure
revenue from our NGM business segment increased
$0.3 million, which was driven by an increase in the number
of carrier customers utilizing our services.

Expense

Cost of revenue. Cost of revenue increased
$10.6 million, of which $1.9 million was attributable
to our Clearinghouse business segment and $8.7 million was
attributable to our NGM business segment. Clearinghouse cost of
revenue increased due to an increase of $4.0 million in
royalty expenses related to U.S. Common Short Code services
and expense related to new deployments. This increase was offset
by a reduction of $2.8 million in personnel and
personnel-related expense as a result of increased operating
efficiencies in support of our platforms. The $8.7 million
increase in NGM cost of revenue was due primarily to an increase
of $3.6 million in personnel and personnel-related expense,
an increase of $2.7 million in consultants and professional
fees, and $2.4 million increase in general support costs
associated with additional deployments for the carrier customers
utilizing our services.

Sales and marketing. Sales and marketing
expense increased $3.3 million, of which $2.1 million
was attributable to our Clearinghouse business segment and
$1.2 million was attributable to our NGM business segment.
Clearinghouse sales and marketing expense increased
$1.6 million due to personnel and personnel-related expense
as a result of additions to our sales and marketing team to
focus on branding, product launches, and expanded DNS service
offerings. The increase in NGM sales and marketing expense was
due predominantly to an increase of $0.7 million in
personnel and personnel-related expense to expand our sales
force for NGM services and increased sales activities for new
business development opportunities.

Research and development. Total research and
development expense remained relatively flat. Research and
development expense for our Clearinghouse business segment
decreased $2.2 million, which was offset by a
$2.3 million increase attributable to our NGM business
segment. Clearinghouse research and development expense
decreased $1.3 million due to reductions in personnel and
personnel-related expense and decreased $0.8 million due to
reductions in consultants and professional fees. The
$2.3 million increase in NGM research and development
expense was attributable to a $1.6 million increase in
personnel and personnel-related expenses due to increased
headcount and a $0.7 million increase related to consulting
fees to support NGM service offerings.

General and administrative. General and
administrative expense increased $9.8 million, of which
$8.8 million was attributable to our Clearinghouse business
segment and $1.0 million was attributable to our NGM
business segment. Clearinghouse general and administrative
expense increased $4.6 million in personnel and
personnel-related expense due to increased headcount and
$2.5 million increase in general facility costs. In
addition, consulting fees to support business growth increased
$1.8 million. The $1.0 million increase in NGM general
and administrative expense was due primarily to personnel and
personnel-related expense to increase headcount to support
business growth.

Depreciation and amortization. Depreciation
and amortization expense increased $2.9 million, of which
$1.7 million was attributable to our Clearinghouse business
segment and $1.2 million was attributable to our NGM
business segment. These increases in each of our segments were
due predominantly to an increase in capital assets purchased and
held during the period.

Restructuring charges. In December 2008, we
recorded restructuring charges for our NGM business segment
consisting of $1.2 million in severance related costs,
primarily due to a workforce reduction, and $0.5 million in
lease and facilities exit costs. There was no corresponding
expense for the year ended December 31, 2007.

Impairment of goodwill. We recorded total
impairment charges of $93.6 million to write down the value
of goodwill from our NGM business segment in 2008. There was no
corresponding expense for the year ended December 31, 2007.

Impairment of long-lived assets. In the fourth
quarter of 2008, we recorded an impairment charge of
$18.2 million to write down our NGM business segment
intangible assets by $12.9 million and property and
equipment assets by $5.3 million. There was no
corresponding expense for the year ended December 31, 2007.

Interest and other expense. Interest and other
expense for the year ended December 31, 2008 increased
$15.1 million as compared to the year ended
December 31, 2007 due primarily to other-than-temporary
impairment charges taken on our ARS of $1.6 million and
cash reserve fund investments of $2.7 million, and losses
on our ARS of $9.0 million in the fourth quarter of 2008
due to the change in categorization of the ARS from
available-for-sale to trading. There was no corresponding
other-than-temporary impairment charges or losses in the year
ended December 31, 2007.

Interest and other income. Interest and other
income for the year ended December 31, 2008 increased
$8.5 million as compared to the year ended
December 31, 2007 due primarily to the gain on our ARS
rights offering of $9.4 million recognized in fourth
quarter of 2008, offset by a decrease in interest income due to
lower yields on lower average cash and short-term investment
balances as compared to the year ended December 31, 2007.

Provision for income taxes. Our annual
effective tax rate increased to 93.5% for the year ended
December 31, 2008 from 39.7% for the year ended
December 31, 2007 due primarily to the impact of the
$93.6 million non-cash impairment charges related to our
write-down of goodwill, none of which is deductible for tax
purposes. The income tax provision for the year ended
December 31, 2008 increased $0.9 million as compared
to the year ended December 31, 2007 due primarily to an
increase in income from operations excluding the goodwill
impairment charges in 2008.

Total revenue. Total revenue increased
$96.2 million due primarily to increases in infrastructure
transactions under our contracts to provide telephone number
portability services in the United States, our expanded range of
DNS services, and growth in the use of U.S. Common Short
Codes.

Addressing. Addressing revenue increased
$5.9 million due to the expanded range of DNS services we
offer as a result of our acquisition of
UltraDNS Corporation in April 2006, and the continued
increase in the use of U.S. Common Short Codes.
Specifically, revenue from DNS services increased
$18.4 million, consisting of a $15.0 million increase
in revenue from increased use of our NeuStar Ultra services, and
a $3.4 million increase in

revenue from an increased number of domain names under
management. In addition, revenue from U.S. Common Short
Codes increased $7.8 million due to an increased number of
subscribers for U.S. Common Short Codes. These increases
were offset by a decrease of $19.5 million in revenue under
our contracts to provide telephone number portability services
in the United States. We believe that this reduction in
addressing revenue was due to a return to normal network
expansion activities by carriers from unusually high levels in
2006, and the reduced pricing under these contracts that went
into effect on January 1, 2007.

Interoperability. Interoperability revenue
increased $5.2 million, of which $1.8 million was
attributable to our Clearinghouse business segment and
$3.4 million was attributable to our NGM business segment.
Clearinghouse revenue increased predominantly due to increased
demand for telephone number portability services in advance of
the introduction of wireless number portability in Canada.
Specifically, revenue from telephone number portability services
in Canada increased $6.4 million, which was partially
offset by a decrease in revenue of $4.8 million under our
contracts to provide telephone number portability services in
the United States due to decreased competitive churn. NGM
revenue was $3.4 million, which was driven by an expansion
of the number of carrier customers utilizing inter-carrier
services and the initial stages of end user adoption of mobile
instant messaging. We acquired the NGM business at the end of
November 2006; thus there was no corresponding NGM revenue in
2006.

Infrastructure and other. Infrastructure and
other revenue increased $85.0 million, of which
$80.4 million was attributable to our Clearinghouse
business segment and $4.6 million was attributable to our
NGM business segment. Clearinghouse revenue increased
predominantly due to increased demand for our network management
services, primarily due to customers making changes to their
networks that required actions such as disconnects and
modifications to network elements. We believe these changes were
driven largely by trends in the industry, including the
implementation of new technologies by our customers, such as
wireless technology upgrades and network optimization. In
addition, infrastructure revenue from our NGM business segment
increased $4.6 million, which was driven by an expansion of
the number of carrier customers utilizing intra-carrier services
and the initial stages of end user adoption of mobile instant
messaging.

Expense

Cost of revenue. Cost of revenue increased
$8.8 million, of which $2.0 million was attributable
to our Clearinghouse business segment and $6.8 million was
attributable to our NGM business segment. Clearinghouse cost of
revenue increased due to an increase of $5.7 million in
royalty expenses related to U.S. Common Short Code
services. This increase was offset by a reduction of
$3.0 million in personnel and personnel-related expense,
which was driven by increased operating efficiencies relating to
support of our platforms, and a reduction of $1.5 million
in contractor costs and professional fees. NGM cost of revenue
totaled $7.3 million for 2007, representing a
$6.8 million increase over the one month of cost of revenue
we incurred following our acquisition of Followap in November
2006.

Sales and marketing. Sales and marketing
expense increased $23.2 million, of which
$13.6 million was attributable to our Clearinghouse
business segment and $9.6 million was attributable to our
NGM business segment. Clearinghouse sales and marketing expense
increased $9.5 million in personnel and personnel-related
expense due primarily to additions to our sales and marketing
team to focus on branding, product launches, expanded DNS
service offerings, and new business development opportunities,
including international expansion. In addition, external costs
and other general marketing expense increased $2.0 million.
NGM sales and marketing expense totaled $10.6 million for
2007, representing a $9.6 million increase over the one
month of sales and marketing expense we incurred following our
acquisition of Followap in November 2006.

Research and development. Research and
development expense increased $9.7 million, of which
$2.4 million was attributable to our Clearinghouse business
segment and $7.3 million was attributable to our NGM
business segment. Clearinghouse research and development expense
increased $2.5 million in personnel and personnel-related
expense due primarily to additions to our research and
development team to support our service offerings. NGM research
and development expense totaled $7.9 million for 2007,
representing a $7.3 million increase over the one month of
research and development expense we incurred following our
acquisition of Followap in November 2006.

General and administrative. General and
administrative expense increased $13.7 million, of which
$5.7 million was attributable to our Clearinghouse business
segment and $8.0 million was attributable to our NGM
business segment. Clearinghouse general and administrative
expense increased $3.9 million in personnel and
personnel-related expense due to increased headcount to support
business growth. In addition, this increase was further
augmented by the reversal of a legal contingency accrual of
$1.5 million in the second quarter of 2006 for which there
was no comparable reversal during the year ended
December 31, 2007. NGM general and administrative expense
totaled $8.2 million for 2007, representing an
$8.0 million increase over the one month of general and
administrative expense we incurred following our acquisition of
Followap in November 2006.

Depreciation and amortization. Depreciation
and amortization expense increased $13.7 million, of which
$5.1 million was attributable to our Clearinghouse business
segment and $8.6 million was attributable to our NGM
business segment. Clearinghouse depreciation and amortization
expense increased primarily due to a $3.4 million increase
in depreciation of capital assets and a $1.7 million
increase in amortization of identified intangibles as a result
of our acquisition of UltraDNS. NGM depreciation and
amortization expense totaled $9.5 million for 2007,
representing an $8.6 million increase over the one month of
depreciation and amortization expense we incurred following our
acquisition of Followap in November 2006. This increase was
primarily due to $7.1 million of expense related to the
amortization of identified intangibles as a result of our
acquisition of Followap.

Interest and other expense. Interest and other
expense for the year ended December 31, 2007 was comparable
to interest and other expense for the year ended
December 31, 2006.

Interest income. Interest income for the year
ended December 31, 2007 increased $0.6 million as
compared to the year ended December 31, 2006 due to higher
yields on average combined cash and short-term investment
balances.

Provision for income taxes. Income tax
provision for the year ended December 31, 2007 increased
$9.4 million as compared to the year ended
December 31, 2006 due primarily to an increase in income
from operations. Our annual effective tax rate decreased to
39.7% for the year ended December 31, 2007 from 41.0% for
the year ended December 31, 2006.

Consolidated
Results of Operations

We operate in two business segments  Clearinghouse
and NGM. We have provided consolidated results of operations for
our Clearinghouse business segment and our NGM business segment.
For further discussion of the operating results of our
Clearinghouse business segment and our NGM business segment,
including revenue, income (loss) from operations, total assets,
goodwill, and intangible assets, see Note 17 to the
Consolidated Financial Statements in Item 8.

Liquidity
and Capital Resources

Our principal source of liquidity is cash provided by operating
activities. Our principal uses of cash have been to fund
acquisitions, stock repurchases, facility expansions, capital
expenditures, working capital and debt service requirements. We
anticipate that our principal uses of cash in the future will be
working capital, capital expenditures, facility expansion, stock
repurchases and acquisitions.

Total cash and cash equivalents and short-term investments were
$161.7 million at December 31, 2008, a decrease from
$198.7 million at December 31, 2007. This decrease was
due primarily to the use of $124.9 million to repurchase
shares of our Class A common stock and the reclassification
of $31.1 million of investments to long-term due to failed
auctions for ARS held by us. Of the $161.7 million included
in total cash and cash equivalents and short-term investments,
$10.8 million is invested in a cash reserve fund that has
been closed to new investments and immediate redemptions since
December 2007. The fund currently has a projected redemption
schedule that will result in approximately 90 to 95 percent
of the fund being redeemed in 2009.

We have a credit facility that is available for cash borrowings
up to $100 million that may be used for working capital,
capital expenditures, general corporate purposes and to finance
acquisitions. Our credit agreement contains customary
representations and warranties, affirmative and negative
covenants, and events of default. Our credit agreement requires
us to maintain a minimum consolidated EBITDA to consolidated
interest charge ratio and a

maximum consolidated senior funded indebtedness to consolidated
EBITDA ratio. If an event of default occurs and is continuing,
we may be required to repay all amounts outstanding under the
credit agreement or we may not be able to borrow cash under the
existing credit facility. In addition, lenders holding more than
50% of the loans and commitments under the new credit agreement
may elect to accelerate the maturity of amounts due thereunder
upon the occurrence and during the continuation of an event of
default. As of and for the year ended December 31, 2008, we
were in compliance with these covenants. As of December 31,
2008, we had no borrowings under the credit facility and we
utilized $8.8 million for outstanding letters of credit.

At December 31, 2008, our long-term investments totaled
$40.5 million and consisted of auction rate securities of
$31.1 million whose underlying assets are student loans, of
which more than 90% are guaranteed by the federal government as
part of the Federal Family Education Loan Program, or FFELP, and
$9.4 million of ARS rights. These auction rate securities
are intended to provide liquidity via an auction process that
resets the applicable interest rate approximately every
30 days and allows investors to either roll over their
holdings or gain immediate liquidity by selling such investments
at par. The underlying maturities of these investments range
from 16 to 38 years. As a result of current negative
conditions in the global credit markets, auctions for our
$31.1 million investment in these securities as of
December 31, 2008 have failed on their respective
settlement dates during the year ended December 31, 2008.
Consequently, the investments are not currently liquid and we
will not be able to access these funds until a future auction of
these investments is successful, they are redeemed by the issuer
of the securities or a buyer is found outside of the auction
process. Given our strong liquidity position and expected cash
flows, we do not anticipate the illiquidity of our auction rate
securities will materially impact our ability to fund our
operations for the next twelve months.

In November 2008, we accepted a settlement offer from the
investment firm that brokered the original purchases of the
$41.7 million par value of auction rate securities The
settlement gave us the right to sell these securities at par
value to the investment firm during a two year period beginning
on June 30, 2010. We intend to exercise the rights in June
2010.

We believe that our existing cash and cash equivalents,
short-term investments and cash from operations will be
sufficient to fund our operations for the next twelve months.

Discussion
of Cash Flows

2008
compared to 2007

Cash
flows from operations

Net cash provided by operating activities for the year ended
December 31, 2008 was $167.6 million, as compared to
$145.9 million for the year ended December 31, 2007.
This $21.7 million increase in net cash provided by
operating activities was principally the result of an increase
in non-cash adjustments of $123.2 million, including
goodwill impairment charges of $93.6 million, a long-lived
assets impairment charge of $18.2 million,
$12.9 million loss on investments held as of
December 31, 2008, and a decrease of $12.6 million
relating to excess tax benefits from stock-based compensation
resulting from decreased sales by employees of stock-based
awards. These non-cash increases were offset by a non-cash gain
of $9.4 million related to our auction rate securities
rights offering. This overall increase of $123.2 million in
non-cash adjustments was offset by a decrease in net income for
the corresponding periods of $88.0 million and a decrease
in net changes in operating assets and liabilities of
$13.4 million.

Net cash provided by investing activities for the year ended
December 31, 2008 was $5.9 million, as compared to net
cash used in investing activities of $110.5 million for the
year ended December 31, 2007. This $116.4 million
increase in net cash provided by investing activities was
principally due to a $127.5 million increase in cash
provided by investments of $45.8 million from redemptions
of our investment in a cash reserve fund as compared to net
purchases of $81.7 million of investments in 2007, and a
decrease of $1.5 million in purchases of property and
equipment. This increase was offset by a $12.5 million
decrease in cash paid for acquisitions during 2008.

Cash
flows from financing

Net cash used in financing activities was $119.9 million
for the year ended December 31, 2008, as compared to net
cash provided by financing activities of $23.6 million for
the year ended December 31, 2007. This $143.5 million
increase in net cash used in financing activities was
principally the result of $124.9 million used to repurchase
our Class A common stock, a $12.6 million decrease in
excess tax benefits from stock-based compensation and a
reduction of $8.2 million in proceeds from the exercise of
stock options.

2007
compared to 2006

Cash
flows from operations

Net cash provided by operating activities for the year ended
December 31, 2007 was $145.9 million, as compared to
cash provided by operating activities of $117.4 million for
the year ended December 31, 2006. This $28.5 million
increase was principally the result of a $28.7 million
reduction to the cash outflow relating to excess tax benefits
from stock-based compensation, and a $18.4 million increase
in net income offset by a $19.8 million increase in other
non-cash adjustments primarily related to depreciation and
amortization resulting predominantly from our acquisitions.

Cash
flows from investing

Net cash used in investing activities for the year ended
December 31, 2007 was $110.5 million, as compared to
$167.8 million for the year ended December 31, 2006.
This $57.3 million decrease in net cash used in investing
activities was principally due to a decrease of
$209.5 million in cash paid for acquisitions, which was
partially offset by $138.6 million increase in the purchase
of short-term investments and a $13.6 million increase in
purchases of property and equipment.

Cash
flows from financing

Net cash provided by financing activities was $23.6 million
for the year ended December 31, 2007, as compared to
$62.1 million for the year ended December 31, 2006.
This $38.5 million decrease in net cash provided by
financing activities was principally the result of a decrease of
$28.7 million of excess tax benefits from stock-based
compensation. In addition, the overall decrease in net cash
provided by financing activities resulted from a decrease in
proceeds of $5.4 million from the exercise of common stock
options and $3.2 million of shares repurchased by us during
the year ended December 31, 2007 pursuant to the exercise
by stock incentive plan participants of their right to elect to
use common stock to satisfy their tax withholding obligations.

Our principal commitments consist of obligations under leases
for office space, computer equipment and furniture and fixtures.
The following table summarizes our long-term contractual
obligations as of December 31, 2008.

Payments
Due by Period

Less Than

1-3

4-5

More Than

Total

1 Year

Years

Years

5 Years

(In thousands)

Capital lease obligations

$

19,419

$

8,576

$

10,843

$



$



Operating lease obligations

26,418

9,284

13,926

3,208



Long-term debt

4,364

2,587

1,777





Total

$

50,201

$

20,447

$

26,546

$

3,208

$



Some of our commercial commitments are secured by standby
letters of credit. The following is a summary of our commercial
commitments secured by standby letters of credit by commitment
date as of December 31, 2008 (in thousands):

Less Than

1-3

4-5

More Than

Total

1 Year

Years

Years

5 Years

(In thousands)

Standby letters of credit

$

8,849

$

8,314

$

535

$



$



The amounts presented in the table above may not necessarily
reflect our actual future cash funding requirements, because the
actual timing of the future payments made may vary from the
stated contractual obligation. In addition, due to the
uncertainty with respect to the timing of future cash flows
associated with our unrecognized tax benefits at
December 31, 2008, we are unable to make reasonably
reliable estimates of the period of cash settlement with the
respective taxing authority. Therefore, $1.1 million of
unrecognized tax benefits have been excluded from the
contractual obligations table above. See Note 14 to the
consolidated financial statements for a discussion on income
taxes.

Effect of
Inflation

Inflation generally affects us by increasing our cost of labor
and equipment. We do not believe that inflation had any material
effect on our results of operations during the years ended
December 31, 2006, 2007 and 2008.

Recent
Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 141(R), Business
Combinations, or SFAS No. 141(R), which replaces
SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest
in the acquiree and the goodwill acquired.
SFAS No. 141(R) also establishes disclosure
requirements which will enable users to evaluate the nature and
financial effects of the business combination.
SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008. Early adoption of this
standard is prohibited. We do not currently expect
SFAS No. 141(R) to have a material impact on our
consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, or SFAS No. 160, which establishes
accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount
of consolidated net income attributable to the parent and to the
holder of the noncontrolling interest, changes in a
parents ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting
requirements that require sufficient disclosures that clearly
identify and distinguish between the interests of the parent and
the interests of the non-controlling owners.
SFAS No. 160 is effective for fiscal years beginning
after

December 15, 2008. Early adoption of this standard is
prohibited. In the absence of any noncontrolling (minority)
interests, we do not currently expect SFAS No. 160 to
have a material impact on our consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position (FSP)
FAS No. 157-2,Effective Date of FASB Statement No. 157, or FSP
FAS No. 157-2,
which delays the effective date of SFAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
The effective date has been delayed by one year to fiscal years
beginning after November 15, 2008 and interim periods
within those fiscal years. We adopted SFAS No. 157
except for those items with respect to which adoption was
specifically deferred under FSP
FAS No. 157-2.
We are currently evaluating the impact of the full adoption of
FAS No. 157 on our consolidated financial statements.

In April 2008, the FASB issued
FSP FAS No. 142-3,Determination of the Useful Life of Intangible Assets, or
FSP
FAS No. 142-3,
which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets. This pronouncement requires enhanced disclosures
concerning a companys treatment of costs incurred to renew
or extend the term of a recognized intangible asset. FSP
FAS No. 142-3
is effective for fiscal years beginning after December 15,
2008. We do not currently expect FSP
FAS No. 142-3
to have a material impact on our consolidated financial
statements.

Off-Balance
Sheet Arrangements

We had no off-balance sheet arrangements as of December 31,
2007 and 2008.

ITEM 7A.

QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of market risks, including changes
in interest rates affecting the return on our investments and
foreign currency fluctuations.

Exposure to market rate risk for changes in interest rates
affects the value of our investment portfolio. We have not used
derivative financial instruments to hedge against such risk in
our investment portfolio. We invest in securities of
highly-rated issuers and follow investment policies limiting,
among other things, the amount of credit exposure to any one
issuer. We seek to limit default risk by purchasing only
investment-grade securities. We do not actively manage the risk
of interest rate fluctuations on our short-term investments;
however, our exposure to this risk is mitigated by the
relatively short-term nature of these investments. Based on a
hypothetical 10% adverse movement in interest rates, our
interest income on our short-term investments for the year ended
December 31, 2008 would have been reduced by approximately
$0.2 million. Our long-term investments in auction rate
securities, or ARS, are classified as trading, with changes in
fair value due to market changes in interest rates recorded in
our earnings each period. Based on a hypothetical 10% adverse
movement in interest rates, our interest income for the
year-ended December 31, 2008 would have been reduced by
approximately $0.2 million related to our ARS.

We have accounts on our foreign subsidiaries ledgers which
are maintained in the respective subsidiarys local foreign
currency and remeasured into the United States dollar. As a
result, we are exposed to movements in the exchange rates of
various currencies against the United States dollar and against
the currencies of other countries in which we sell services. As
of December 31, 2008, our assets and liabilities related to
non-dollar denominated currencies were primarily related to
intercompany payables and receivables. We do not expect that an
increase or decrease of 10% in foreign exchange rate would have
a material impact on our financial position.

Because our sales and expense are primarily denominated in local
currency, the impact of foreign currency fluctuations on sales
and expenses has not been material, and we do not employ
measures intended to manage foreign exchange rate risk.

We have audited the accompanying consolidated balance sheets of
NeuStar, Inc. as of December 31, 2007 and 2008, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of NeuStar, Inc. at December 31, 2007
and 2008, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
NeuStar, Inc.s internal control over financial reporting
as of December 31, 2008, based on criteria established in
Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 2, 2009 expressed an unqualified
opinion thereon.

Preferred stock, $0.001 par value; 100,000,000 shares
authorized; No shares issued or outstanding as of
December 31, 2007 and 2008





Class A common stock, $0.001 par value;
200,000,000 shares authorized; 77,082,161 shares
issued and outstanding as of December 31, 2007;
78,925,222 shares issued and outstanding as of
December 31, 2008

NeuStar, Inc. (the Company) was incorporated as a Delaware
corporation in 1998. The Company provides essential
clearinghouse services to the communications industry and
enterprise customers. Its customers use the databases the
Company contractually maintains in its clearinghouse to obtain
data required to successfully route telephone calls in North
America, to exchange information with other communications
service providers and to manage technological changes in their
own networks. The Company operates the authoritative directories
that manage virtually all telephone area codes and numbers, and
it enables the dynamic routing of calls among thousands of
competing communications service providers, or CSPs, in the
United States and Canada. All CSPs that offer telecommunications
services to the public at large, or telecommunications service
providers, must access the Companys clearinghouse to
properly route virtually all of their customers calls. The
Company also provides clearinghouse services to emerging CSPs,
including Internet service providers, mobile network operators,
cable television operators, and voice over Internet protocol, or
VoIP, service providers. In addition, the Company provides
domain name services, including internal and external managed
DNS solutions that play a key role in directing and managing
traffic on the Internet, and it also manages the authoritative
directories for the .us and .biz Internet domains. The Company
operates the authoritative directory for U.S. Common Short
Codes part of the short messaging service relied upon by the
U.S. wireless industry, and provides solutions used by
mobile network operators throughout Europe to enable mobile
instant messaging for their end users.

The Company was founded to meet the technical and operational
challenges of the communications industry when the
U.S. government mandated local number portability in 1996.
While the Company remains the provider of the authoritative
solution that the communications industry relies upon to meet
this mandate, the Company has developed a broad range of
innovative services to meet an expanded range of customer needs.
The Company provides critical technology services that solve the
addressing, interoperability and infrastructure needs of CSPs
and enterprises. These services are now used by CSPs and
enterprises to manage a range of their technical and operating
requirements, including:



Addressing. The Company enables CSPs and
enterprises to use critical, shared addressing resources, such
as telephone numbers, Internet top-level domain names, and
U.S. Common Short Codes.



Interoperability. The Company enables CSPs to
exchange and share critical operating data so that
communications originating on one providers network can be
delivered and received on the network of another CSP. The
Company also facilitates order management and work flow
processing among CSPs.



Infrastructure and Other. The Company enables
CSPs to more efficiently manage their networks by centrally
managing certain critical data they use to route communications
over their own networks.

2.

SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

Basis of
Presentation and Consolidation

The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material
intercompany transactions and accounts have been eliminated in
consolidation. The Company consolidates investments where it has
a controlling financial interest as defined by Accounting
Research Bulletin (ARB) No. 51, Consolidated Financial
Statements, as amended by Statement of Financial Accounting
Standards (SFAS) No. 94, Consolidation of all
Majority-Owned Subsidiaries. The usual condition for
controlling financial interest is ownership of a majority of the
voting interest and, therefore, as a general rule, ownership,
directly or indirectly, of more than 50% of the outstanding
voting shares is a condition indicating consolidation. Minority
interest is recorded in the statement of operations for the
share of income or loss allocated to minority stockholders to
the extent that the minority stockholders investment in
the subsidiary does not fall below zero. For investments in
variable interest entities, as defined by Financial Accounting
Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities, the Company
would consolidate when it is determined to be the primary
beneficiary of a variable interest entity. For those investments
in entities where the Company has significant

influence over operations, but where the Company neither has a
controlling financial interest nor is the primary beneficiary of
a variable interest entity, the Company follows the equity
method of accounting pursuant to Accounting Principles Board
(APB) Opinion No. 18, The Equity Method of Accounting
for Investments in Common Stock. The Company does not have
any variable interest entities or investments accounted for
under the equity method of accounting.

Use of
Estimates

The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense
during the reporting periods. Significant estimates and
assumptions are inherent in the analysis and the measurement of
deferred tax assets, the identification and quantification of
income tax liabilities due to uncertain tax positions,
restructuring liabilities, valuation of investments,
recoverability of intangible assets, other long-lived assets and
goodwill, and the determination of the allowance for doubtful
accounts. The Company bases its estimates on historical
experience and assumptions that it believes are reasonable.
Actual results could differ from those estimates.

The annual goodwill impairment test, any required interim
goodwill impairment test and the related determination of the
fair value of reporting units and intangible assets each involve
the use of significant estimates and assumptions by management,
and are inherently subjective. In particular, for each of the
Companys reporting units, the significant assumptions used
to determine fair value include market penetration, anticipated
growth rates, and risk-adjusted discount rates for the income
approach, as well as the selection of comparable companies and
comparable transactions for the market approach. Changes in
estimates and assumptions could have a significant impact on
whether or not an impairment charge is recognized and also the
magnitude of any such charge. Specifically, for the
Companys Next Generation Messaging (NGM) reporting unit,
due to the early stage of its operations and the emerging nature
of mobile instant messaging technology, the assumptions and
estimates used by management that are incorporated within the
NGM valuation have a high degree of subjectivity, and are thus
more likely to change over time. In addition, because relatively
few carriers control a substantial portion of the end users who
will drive the success of mobile instant messaging, the
activities of NGMs largest customers can have a
significant impact on these assumptions and estimates.

In 2008, the Company recorded two goodwill impairment charges
for its NGM reporting unit. Late in the first quarter of 2008,
there were changes in the market and identified customer-related
events that caused the Company to change certain of its
assumptions underlying the financial forecast relating to NGM,
most notably its assumptions about end-user adoption rates.
Projections of future cash flows for the NGM business are
particularly sensitive to these assumptions. As a result, when
the events of the first quarter caused the Company to reduce its
projections relating to the rate at which new end users would
begin using mobile instant messaging, those changed assumptions
had a dramatic impact on the financial forecast for that
business and the estimated fair value of the NGM business. As a
result, the Company recorded a $29.0 million impairment
charge in the first quarter of the 2008 fiscal year.

In the fourth quarter of 2008, in response to lower than
anticipated adoption rates and the resulting underperformance of
the NGM business, as well as the manner in which the mobile data
market had evolved and was evolving, we added new leadership and
conducted a strategic evaluation of the NGM business. The goal
of this strategic evaluation was to position NGM for future
long-term success in the mobile instant messaging market. During
the course of this evaluation, the Company conducted a thorough
review of the NGM business, including its experience in the
mobile instant messaging market since the acquisition of
Followap Inc. in November 2006, the current state of the mobile
instant messaging market and related markets, the performance of
the Companys competitors for these services and consumer
demand. Following this evaluation, the Company decided to change
the direction of its NGM business to offer enhanced end user
experiences, faster deployments, and greater operator control,
all of which would be delivered from a common infrastructure.
Associated with this decision, the Company

began to realign the NGM organization, and announced a
restructuring plan in December 2008 to leverage its existing
operational resources to support the NGM initiatives. In
addition, consistent with the new strategic direction, the
Company began development of a new technology platform that
would serve as the common infrastructure for each of its NGM
customers. This repositioning of the NGM business will result in
a delay in market penetration and delayed growth in end user
adoption rates. At the same time, the NGM business will require
continued investment and will continue to experience net cash
outflows until that market penetration and growth occurs. The
revisions to the financial forecast to reflect this new
strategic direction resulted in a decline in the estimated fair
value of the NGM business. As a result, the Company recorded an
additional goodwill impairment charge of $64.6 million in
the fourth quarter of 2008 (see Note 7).

The key assumptions used in the Companys annual goodwill
impairment test to determine the fair value of its NGM reporting
unit included: (a) cash flow projections which include
growth assumptions for forecasted revenue and expenses;
(b) a terminal multiple of 7.5 times used to determine the
expected proceeds resulting from the sale of its NGM reporting
unit at the end of the cash flow projection period (c) a
discount rate of 45%, which was based upon its NGM reporting
units weighted cost of capital adjusted for the risks
associated with the operations at the time of the annual
goodwill impairment test; (d) selection of comparable
companies and transactions used in the market approach; and
(e) assumptions in weighting the results of the discounted
cash flow approach, income approach and market approach
valuation techniques. A variance in the discount rate could have
a significant effect on the amount of the goodwill impairment
charge recorded.

The Company believes that the assumptions and estimates used to
determine the estimated fair values of each of its reporting
units are reasonable; however, these estimates are inherently
subjective, and there are a number of factors, including factors
outside of the Companys control, that could cause actual
results to differ from the Companys estimates, including
further delays from changes in strategy by participants in the
mobile instant messaging market, lack of effective marketing
efforts to promote mobile instant messaging to end users and
unforeseen changes in the market. Any changes in key assumptions
about the Companys businesses and their prospects, or
changes in market conditions, could result in an additional
impairment charge. Such a charge could have a material effect on
the Companys consolidated financial position because of
the significance of goodwill and intangible assets to the
Companys consolidated balance sheet. As of
December 31, 2008, the Company had $95.7 million and
$22.3 million, respectively, in goodwill for its
Clearinghouse reporting unit and its NGM reporting unit, subject
to future impairment tests.

Fair
Value of Financial Instruments

Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosures about Fair Value of Financial Instruments,
requires disclosures of fair value information about financial
instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. Due to their
short-term nature, the carrying amounts reported in the
consolidated financial statements approximate the fair value for
cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses. As of December 31, 2007, the Company
believes the carrying value of its long-term notes receivable
approximates fair value as the interest rates approximate a
market rate. The fair value of the Companys long-term debt
is based upon quoted market prices for the same and similar
issuances giving consideration to quality, interest rates,
maturity and other characteristics. As of December 31, 2007
and 2008, the Company believes the carrying amount of its
long-term debt approximates its fair value since the fixed and
variable interest rates of the debt approximate a market rate.
The Company determines the fair values of its long-term
investments using discounted cash flow models (see Note 5).
The Company has a right to sell its auction rate securities,
beginning in June 2010, to the investment firm that brokered the
original purchases. The carrying value of the Companys
auction rate securities rights is based on the estimated
discounted cash flow of the associated auction rate securities.
As permitted under SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities Including
an amendment of FASB Statement No. 115
(SFAS No. 159), the Company elected fair value
measurement for the auction rate securities rights.

The Company considers all highly liquid investments, which are
readily convertible into cash and have original maturities of
three months or less at the time of purchase, to be cash
equivalents. Supplemental non-cash information to the
consolidated statements of cash flows is as follows:

Year Ended December 31,

2006

2007

2008

(In thousands)

Fixed assets acquired through capital leases

$

5,154

$

5,597

$

14,150

Fixed assets acquired through notes payable



10,049



Accounts payable incurred to purchase fixed assets

85

345

294

Restricted
Cash

At December 31, 2007 and 2008, approximately $488,000 and
$496,000, respectively, of cash was held with a local bank in
the form of a bank guarantee as security for the Companys
performance under a noncancelable operating lease agreement and
was classified as restricted cash on the consolidated balance
sheets.

Concentrations
of Credit Risk

Financial instruments that are potentially subject to a
concentration of credit risk consist principally of cash, cash
equivalents, investments, and accounts receivable. The
Companys cash and short-term investment policies are in
place to restrict placement of these instruments with only
financial institutions evaluated as highly creditworthy.

With respect to accounts receivable, the Company performs
ongoing evaluations of its customers, generally granting
uncollateralized credit terms to its customers, and maintains an
allowance for doubtful accounts based on historical experience
and managements expectations of future losses. Customers
under the Companys contracts with the North American
Portability Management LLC are charged a Revenue Recovery
Collection fee (See Accounts Receivable, Revenue Recovery
Collection and Allowance for Doubtful Accounts).

Investments

The Companys investments classified as available-for-sale
and are carried at estimated fair value, as determined by quoted
market prices or other valuation methods, with unrealized gains
and losses reported as a separate component of accumulated other
comprehensive loss. Realized gains and losses and declines in
value judged to be other-than-temporary, if any, on
available-for-sale securities are included in interest and other
expense. The cost of available-for-sale short-term investments
sold is based on the specific identification method for the
years ended December 31, 2006, and 2007. Because of
other-than-temporary charges related to short-term investments
recognized in earnings during 2008, the cost of securities sold
during 2008 is reduced by a pro-rata allocation of any
other-than-temporary loss previously recognized as a charge to
earnings. Interest and dividends on these securities is included
in interest and other income.

The Company periodically evaluates whether any declines in the
fair value of investments are other-than-temporary. This
evaluation consists of a review of several factors, including
but not limited to: the length of time and extent that a
security has been in an unrealized loss position; the existence
of an event that would impair the issuers future earnings
potential; the near-term prospects for recovery of the market
value of a security; and the intent and ability of the Company
to hold the security until the market value recovers. Declines
in value below cost for investments when it is considered
probable that all contractual terms of the investment will be
satisfied, which are primarily due to changes in market demand
and not because of increased credit risk, and which the Company
intends and has the ability to hold the investment for a period
of time sufficient to allow a market recovery, are not
recognized as an other-than temporary charge in earnings.

The Companys investments classified as trading are carried
at estimated fair value as determined by quoted market prices or
other valuation methods, with unrealized gains and losses
reported in other (expense) income. At December 31, 2008,
the Company classified its auction rate securities as trading
pursuant to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, with changes in
the fair value of these securities recorded in earnings (see
Note 3). Interest and dividends on these securities is
included in interest and other income.

Accounts receivable are recorded at the invoiced amount and do
not bear interest. In accordance with the Companys
contracts with North American Portability Management LLC, the
Company bills a Revenue Recovery Collections (RRC) fee to offset
uncollectible receivables from any individual customer. The RRC
fee is based on a percentage of monthly billings. Beginning
July 1, 2005, the RRC fee was 1% of monthly billings. On
July 1, 2008 the RRC fee was reduced to 0.75%. The RRC fees
are recorded as an accrued liability when collected. If the RRC
fee is insufficient, the amounts can be recovered from the
customers. Any accrued RRC fees in excess of uncollectible
receivables are paid back to the customers annually on a pro
rata basis. RRC fees of $3.6 million and $3.3 million
are included in accrued expenses as of December 31, 2007
and 2008, respectively. All other receivables related to
services not covered by the RRC fees are evaluated and, if
deemed not collectible, are reserved. The Company recorded an
allowance for doubtful accounts of $1.7 million and
$1.2 million as of December 31, 2007 and 2008,
respectively. Bad debt expense amounted to $2.0 million,
$2.6 million and $2.4 million for the years ended
December 31, 2006, 2007 and 2008, respectively.

Deferred
Financing Costs

The Company amortizes deferred financing costs using the
effective-interest method and records such amortization as
interest expense. Amortization of debt discount and annual
commitment fees for unused portions of available borrowings are
also recorded as interest expense.

Property
and Equipment

Property and equipment, including leasehold improvements and
assets acquired through capital leases, are recorded at cost,
net of accumulated depreciation and amortization. Depreciation
and amortization of property and equipment are determined using
the straight-line method over the estimated useful lives of the
assets, as follows:

Computer hardware

3-5 years

Equipment

5 years

Furniture and fixtures

5-7 years

Leasehold improvements

Lesser of related lease term or useful life

Amortization expense of capital leased assets is included in
depreciation and amortization expense in the consolidated
statements of operations. Replacements and major improvements
are capitalized; maintenance and repairs are charged to expense
as incurred. Impairments of long-lived assets are determined in
accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets,
(SFAS No. 144).

The Company capitalizes software development and acquisition
costs in accordance with Statement of Position (SOP)
No. 98-1,Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
SOP No. 98-1
requires the capitalization of costs incurred in connection with
developing or obtaining software for internal use. Costs
incurred to develop the application are capitalized, while costs
incurred for planning the project and for post-implementation
training and maintenance are expensed as incurred. The
capitalized costs of purchased technology and software
development are amortized using the straight-line method over
the estimated useful life of three to five years. During the
years ended December 31, 2007 and 2008, the Company
capitalized costs related to internal use software of
$11.0 million and $15.9 million, respectively.
Amortization expense related to internal use

software for the years ended December 31, 2006, 2007 and
2008 was $5.8 million, $9.2 million and
$10.1 million, respectively, and is included in
depreciation and amortization expense in the consolidated
statements of operations.

Goodwill

Goodwill represents the excess of the purchase price over the
fair value of assets acquired, as well as other definite-lived
intangible assets. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill and
indefinite-lived intangible assets are not amortized, but are
reviewed for impairment upon the occurrence of events or changes
in circumstances that would reduce the fair value of such assets
below their carrying amount. Goodwill is required to be tested
for impairment at least annually, or on an interim basis if
circumstances change that would indicate the possibility of
impairment. For purposes of the Companys annual impairment
test, the Company has identified and assigned goodwill to two
reporting units, Clearinghouse and NGM.

Goodwill is tested for impairment at the reporting unit level
using a two-step approach. The first step is to compare the fair
value of a reporting units net assets, including assigned
goodwill, to the book value of its net assets, including
assigned goodwill. Fair value of the reporting unit is
determined using both an income and market approach. To assist
in the process of determining if a goodwill impairment exists,
the Company performs internal valuation analyses and considers
other market information that is publicly available, and the
Company may obtain valuations from external advisors. If the
fair value of the reporting unit is greater than its net book
value, the assigned goodwill is not considered impaired. If the
fair value is less than the reporting units net book
value, the Company performs a second step to measure the amount
of the impairment, if any. The second step is to compare the
book value of the reporting units assigned goodwill to the
implied fair value of the reporting units goodwill, using
a theoretical purchase price allocation. If the carrying value
of goodwill exceeds the implied fair value, an impairment has
occurred and the Company is required to record a write-down of
the carrying value and charge the impairment as an operating
expense in the period the determination is made. In 2008, the
Company recorded goodwill impairment charges of
$93.6 million related to its NGM reporting unit (see
Note 7). There were no impairment charges related to the
Companys Clearinghouse reporting unit in the year ended
December 31, 2008. There were no impairment charges
recognized during the years ended December 31, 2006 and
2007.

Identifiable
Intangible Assets

Identifiable intangible assets are amortized over their
respective estimated useful lives using a method of amortization
that reflects the pattern in which the economic benefits of the
intangible assets are consumed or otherwise used and are
reviewed for impairment in accordance with
SFAS No. 144. In 2008, the Company recorded an
intangible asset impairment of $12.9 million related to its
NGM reporting unit (see Note 7).

The Companys identifiable intangible assets are amortized
as follows:

Years

Method

Acquired technologies

3 to 5

Straight-line

Customer lists and relationships

3 to 7

Various

Trade name

3

Straight-line

Amortization expense related to acquired technologies and
customer lists and relationships is included in depreciation and
amortization expense in the consolidated statements of
operations.

Impairment
of Long-Lived Assets

In accordance with SFAS No. 144, the Company reviews
long-lived assets and certain identifiable intangible assets for
impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to future
undiscounted net cash flows expected to be generated by the
assets. Recoverability

measurement and estimating of undiscounted cash flows is done at
the lowest possible level for which there is identifiable
assets. If such assets are considered impaired, the amount of
impairment recognized is equal to the amount by which the
carrying amount of assets exceeds the fair value of the assets.
Assets to be disposed of are recorded at the lower of the
carrying amount or fair value less costs to sell.

In connection with the interim and annual goodwill impairment
tests of the NGM reporting unit in the first and fourth quarters
of 2008, the Company performed a recoverability test of the
long-lived assets of its NGM reporting unit. For purposes of
recognition and measurement of an impairment, the Company
determined that the lowest level of identifiable cash flows is
at the NGM reporting unit level. This asset grouping at the NGM
reporting unit level was determined as the NGM long-lived assets
do not have identifiable cash flows that are independent of the
cash flows of other NGM assets and liabilities.

The Company concluded that the future undiscounted cash flows of
the NGM asset group exceeded its carrying amount as of
March 31, 2008 and no asset impairment charge was
recognized at such time. The Company determined that the
undiscounted cash flows of the NGM asset group were below the
carrying amount as of October 1, 2008, and an impairment of
long-lived assets charge of $18.2 million was recognized
during the fourth quarter of 2008 in the consolidated statements
of operations (see Notes 7 and 8).

Revenue
Recognition

The Company provides essential clearinghouse services to the
communications industry and enterprises that address their
addressing, interoperability, and infrastructure needs. The
Companys revenue recognition policies are in accordance
with the Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition. The
Company provides the following services pursuant to various
private commercial and government contracts.

Addressing

The Companys addressing services include telephone number
administration, implementing the allocation of pooled blocks of
telephone numbers, directory services for Internet domain names
and U.S. Common Short Codes, and internal and external
managed domain name services. The Company generates revenue from
its telephone number administration services under two
government contracts. Under its contract to serve as the North
American Numbering Plan Administrator, the Company earns a fixed
annual fee and recognizes this fee as revenue on a straight-line
basis as services are provided. Under the Companys
contract to serve as the National Pooling Administrator, the
Company earns a fixed fee associated with administration of the
pooling system plus reimbursement for costs incurred. The
Company recognizes revenue for this contract based on costs
incurred plus a pro rata amount of the fixed fee. In the event
the Company estimates losses on its fixed fee contracts, the
Company recognizes these losses in the period in which a loss
becomes apparent.

In addition to the administrative functions associated with its
role as the National Pooling Administrator, the Company also
generates revenue from implementing the allocation of pooled
blocks of telephone numbers under its long-term contracts with
North American Portability Management LLC, and the Company
recognizes revenue on a per transaction fee basis as the
services are performed. For its Internet domain name services,
the Company generates revenue for Internet domain registrations,
which generally have contract terms between one and ten years.
The Company recognizes revenue on a straight-line basis over the
lives of the related customer contracts.

The Company generates revenue through internal and external
managed domain name services. The Companys revenue
consists of customer
set-up fees,
monthly recurring fees and per transaction fees for transactions
in excess of pre-established monthly minimums under contracts
with terms ranging from one to three years. Customer
set-up fees
are not considered a separate deliverable and are deferred and
recognized on a straight-line basis over the term of the
contract. Under the Companys contracts to provide its
managed domain name services, customers have contractually
established monthly transaction volumes for which they are
charged a

recurring monthly fee. Transactions processed in excess of the
pre-established monthly volume are billed at a contractual per
transaction rate. Each month the Company recognizes the
recurring monthly fee and usage in excess of the established
monthly volume on a per transaction basis as services are
provided. The Company also generates revenue from one-time
project fees, which are recognized over the contract terms. The
Company generates revenue from its U.S. Common Short Code
services under short-term contracts ranging from three to twelve
months, and the Company recognizes revenue on a straight-line
basis over the term of the customer contracts.

Interoperability

The Companys interoperability services consist primarily
of wireline and wireless number portability and order management
services. The Company generates revenue from number portability
under its long-term contracts with North American Portability
Management LLC and Canadian LNP Consortium, Inc. The Company
recognizes revenue on a per transaction fee basis as the
services are performed. The Company provides order management
services (OMS), consisting of customer
set-up and
implementation followed by transaction processing, under
contracts with terms ranging from one to three years. Customer
set-up and
implementation is not considered a separate deliverable;
accordingly, the fees are deferred and recognized as revenue on
a straight-line basis over the term of the contract. Per
transaction fees are recognized as the transactions are
processed. The Company generates revenue from its inter-carrier
mobile instant messaging services under contracts with mobile
operators that range from one to three years. These contracts
consist of license fees based on the number of subscribers that
use mobile instant messaging services, as well as fees for
set-up and
implementation. The Company recognizes license fee revenue
ratably over the term of the contract after completion of
customer
set-up and
implementation. Customer
set-up and
implementation is not considered a separate deliverable;
accordingly, the fees are deferred and recognized as revenue on
a straight line basis over the remaining term of the contract
following delivery of the
set-up and
implementation services.

Infrastructure
and Other

The Companys infrastructure services consist primarily of
network management and connection services. The Company
generates revenue from network management services under its
long-term contracts with North American Portability
Management LLC. The Company recognizes revenue on a per
transaction fee basis as the services are performed. In
addition, the Company generates revenue from connection fees and
system enhancements under its contracts with North American
Portability Management LLC. The Company recognizes connection
fee revenue as the service is performed. System enhancements are
provided under contracts in which the Company is reimbursed for
costs incurred plus a fixed fee, and revenue is recognized based
on costs incurred plus a pro rata amount of the fee. The Company
generates revenue from its intra-carrier mobile instant
messaging services under contracts with mobile operators that
range from one to three years. These contracts consist of
license fees based on the number of subscribers that use mobile
instant messaging services, as well as fees for
set-up and
implementation. The Company recognizes license fee revenue
ratably over the term of the contract after completion of
customer
set-up and
implementation. Customer
set-up and
implementation is not considered a separate deliverable;
accordingly, the fees are deferred and recognized as revenue on
a straight line basis over the remaining term of the contract
following delivery of the
set-up and
implementation services.

Significant
Contracts

The Company provides wireline and wireless number portability,
implements the allocation of pooled blocks of telephone numbers
and provides network management services pursuant to seven
contracts with North American Portability Management LLC, an
industry group that represents all telecommunications service
providers in the United States. The Company recognizes revenue
under its contracts with North American Portability Management
LLC primarily on a per transaction basis. The aggregate fees for
transactions processed under these contracts are determined by
the total number of transactions, and these fees are billed to
telecommunications service providers based on their allocable
share of the total transaction charges. This allocable share is
based on each respective

telecommunications service providers share of the
aggregate end-user services revenues of all
U.S. telecommunications service providers, as determined by
the Federal Communications Commission (FCC). Under the
Companys contracts, the Company also bills a RRC fee equal
to a percentage of monthly billings to its customers, which is
available to the Company if any telecommunications service
provider fails to pay its allocable share of total transactions
charges. The amount of revenue derived under the Companys
contracts with North American Portability Management LLC
was approximately $249.3 million, $301.8 million and
$331.8 million for the years ended December 31, 2006,
2007 and 2008, respectively.

Prior to 2007, the per transaction pricing under these contracts
provided for annual volume-based credits that were earned on all
transactions in excess of the pre-determined annual volume
threshold. For 2006, the maximum aggregate volume-based credit
was $7.5 million, which was applied via a reduction in per
transaction pricing once the pre-determined annual volume
threshold was surpassed. When the aggregate credit was fully
satisfied, the per transaction pricing was restored to the
prevailing contractual rate. In 2006, the predetermined annual
transaction volume threshold under these contracts was exceeded,
which resulted in the issuance of $7.5 million of
volume-based credits. In September 2006, the Company amended its
contracts with North American Portability Management LLC. Under
these amended terms, no volume-based credits were applied in
2007 and none will be applied in later fiscal periods. For 2007,
pricing was $0.91 per transaction regardless of transaction
volume. Beginning January 1, 2008, per transaction pricing
is derived on a straight-line basis using an effective rate
calculation based on annualized transaction volume between
200 million and 587.5 million. For annualized
transaction volumes less than or equal to 200 million, the
per transaction price is equal to a flat rate of $0.95 per
transaction. For annualized volumes greater than or equal to
587.5 million, the per transaction price is equal to a flat
rate of $0.75 per transaction. For the year ended
December 31, 2008, the weighted average per transaction
price was $0.86.

Service
Level Standards

Pursuant to certain of the Companys private commercial
contracts, the Company is subject to service level standards and
to corresponding penalties for failure to meet those standards.
The Company records a provision for these performance-related
penalties when it becomes aware that required service levels
have not been met, triggering the requirement to pay a penalty,
which results in a corresponding reduction to revenue.

Cost of
Revenue and Deferred Costs

Cost of revenue includes all direct materials, direct labor, and
those indirect costs related to generation of revenue such as
indirect labor, materials and supplies and facilities cost. The
Companys primary cost of revenue is related to personnel
costs associated with service implementation, product
maintenance, customer deployment and customer care, including
salaries, stock-based compensation and other personnel-related
expense. In addition, cost of revenue includes costs relating to
maintaining the Companys existing technology and services,
as well as royalties paid related to the Companys
U.S. Common Short Code services. Cost of revenue also
includes the costs incurred by the Companys information
technology and systems department, including network costs, data
center maintenance, database management, data processing costs,
and facilities costs.

Deferred costs represent direct labor related to professional
services incurred for the setup and implementation of contracts.
These costs are recognized in cost of revenue on a straight-line
basis over the contract term. Deferred costs also include
royalties paid related to the Companys U.S. Common
Short Code services, which are recognized in cost of revenue on
a straight-line basis over the contract term. Deferred costs are
classified as such on the consolidated balance sheets.

Research
and Development

The Company expenses its research and development costs as
incurred. Research and development expense consists primarily of
personnel costs, including salaries, stock-based compensation
and other personnel-related

expense, consulting fees, and the costs of facilities, computer
and support services used in service and technology development.

Advertising

The Company expenses advertising as incurred. Advertising
expense was approximately $1.1 million, $2.7 million
and $3.4 million for the years ended December 31,
2006, 2007 and 2008, respectively.

Stock-Based
Compensation

The Company accounts for its stock-based compensation plans
under the recognition and measurement provisions of
SFAS No. 123(R), Share-Based Payment
(SFAS No. 123(R)). Stock-based compensation expense
includes: (a) compensation cost for all stock-based awards
granted prior to but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123, and
(b) compensation cost for all stock-based awards granted
subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of
SFAS No. 123(R). The Company estimated the value of
stock-based awards on the date of grant using the Black-Scholes
option-pricing models. For stock-based awards subject to graded
vesting, the Company has utilized the straight-line
method for allocating compensation cost by period.

In accordance with FASB Staff Position
No. FAS 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards,
the Company elected to adopt the alternative method for
calculating the tax effects of stock-based compensation pursuant
to SFAS No. 123(R), as provided in this FASB Staff
Position. The alternative transition method includes a
simplified method to establish the beginning balance of the
additional paid-in capital pool (APIC pool) related to the tax
effects of employee stock-based compensation, which is available
to absorb tax deficiencies recognized subsequent to the adoption
of SFAS No. 123(R). The Company presents benefits of
tax deductions in excess of the compensation cost recognized
(excess tax benefits) as a financing cash inflow with a
corresponding operating cash outflow. For the years ended
December 31, 2006, 2007 and 2008, the Company included
$49.5 million, $20.8 million and $8.2 million,
respectively, of excess tax benefits as a financing cash inflow
with a corresponding operating cash outflow.

Basic and
Diluted Net Income per Common Share

Net income per common share is computed in accordance with
SFAS No. 128, Earnings Per Share. Basic net
income per common share is computed by dividing net income by
the weighted-average number of common shares outstanding.
Unvested restricted stock and performance vested restricted
stock units (PVRSU) are excluded from the
computation of basic net income per common share because the
shares have not yet been earned by the shareholder. Stock
options are also excluded since they are not considered
outstanding shares. Diluted net income per common share assumes
dilution and is computed based on the weighted-average number of
common shares outstanding after consideration of the dilutive
effect of stock options, unvested restricted stock and PVRSU.
The effect of dilutive securities is computed using the treasury
stock method and average market prices during the period.
Dilutive securities with performance conditions are excluded
from the computation until the performance conditions are met.

Income
Taxes

The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
(SFAS No. 109). Under SFAS No. 109, the
liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined
based on temporary differences between the financial reporting
bases and the tax bases of assets and liabilities. Deferred tax
assets are also recognized for tax net operating loss
carryforwards. These deferred tax assets and liabilities are
measured using the enacted tax rates and laws that will be in
effect when such amounts are expected to be reversed or
utilized. The realization of total

deferred tax assets is contingent upon the generation of future
taxable income. Valuation allowances are provided to reduce such
deferred tax assets to amounts more likely than not to be
ultimately realized.

Income tax provision includes U.S. federal, state, local
and foreign income taxes and is based on pre-tax income or loss.
The interim period provision or benefit for income taxes is
based upon the Companys estimate of its annual effective
income tax rate. In determining the estimated annual effective
income tax rate, the Company analyzes various factors, including
projections of the Companys annual earnings and taxing
jurisdictions in which the earnings will be generated, the
impact of state and local income taxes and the ability of the
Company to use tax credits and net operating loss carryforwards.

In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109. FIN 48 provides a
two-step approach to recognize and measure tax benefits when the
realization of the benefits is uncertain. The first step is to
determine whether the benefit is to be recognized; the second
step is to determine the amount to be recognized. Income tax
benefits should be recognized when, based on the technical
merits of a tax position, the entity believes that if a dispute
arose with the taxing authority and were taken to a court of
last resort, it is more likely than not (i.e., a
probability of greater than 50 percent) that the tax
position would be sustained as filed. If a position is
determined to be more likely than not of being sustained, the
reporting enterprise should recognize the largest amount of tax
benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with the taxing authority. The
Companys practice is to recognize interest and penalties
related to income tax matters in income tax expense.

Foreign
Currency

Assets and liabilities of consolidated foreign subsidiaries,
whose functional currency is the local currency, are translated
to U.S. dollars at fiscal year end exchange rates. Revenue
and expense items are translated to U.S. dollars at the
average rates of exchange prevailing during the fiscal year. The
adjustment resulting from translating the financial statements
of such foreign subsidiaries to U.S. dollars is reflected
as a foreign currency translation adjustment and reported as a
component of accumulated other comprehensive loss in the
consolidated statement of stockholders equity.

Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result
in transaction gains or losses, which are reflected within
interest and other expense in the consolidated statement of
operations.

Comprehensive
Income

Comprehensive income is comprised of net income and other
comprehensive loss, which includes certain changes in equity
that are excluded from income. The Company includes unrealized
holding gains and losses on available-for-sale securities, if
any, and foreign currency translation adjustments in other
comprehensive loss in the consolidated statement of
stockholders equity. Comprehensive income was
approximately $92.2 million and $3.6 million for the
years ended December 31, 2007 and 2008, respectively. There
were no material differences between net income and
comprehensive net income for the year ended December 31,
2006.

Recent
Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 141(R), Business
Combinations, or SFAS No. 141(R), which replaces
SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest
in the acquiree and the goodwill acquired.
SFAS No. 141(R) also establishes disclosure
requirements which will enable users to evaluate the nature and
financial effects of the business combination.
SFAS No. 141(R) is effective for fiscal years
beginning after

December 15, 2008. Early adoption of this standard is
prohibited. The Company does not currently expect
SFAS No. 141(R) to have a material impact on its
consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, or SFAS No. 160, which establishes
accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount
of consolidated net income attributable to the parent and to the
holder of the noncontrolling interest, changes in a
parents ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting
requirements that require sufficient disclosures that clearly
identify and distinguish between the interests of the parent and
the interests of the non-controlling owners.
SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008. Early adoption of this standard is
prohibited. In the absence of any noncontrolling (minority)
interests, the Company does not currently expect
SFAS No. 160 to have a material impact on its
consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position (FSP) FAS
No. 157-2,Effective Date of FASB Statement No. 157, or FSP FAS
No. 157-2,
which delays the effective date of SFAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
The effective date has been delayed by one year to fiscal years
beginning after November 15, 2008 and interim periods
within those fiscal years. The Company has adopted
SFAS No. 157 except for those items specifically
deferred under FSP FAS
No. 157-2.
The Company is currently evaluating the impact of the full
adoption of FAS No. 157 on its consolidated financial
statements.

In April 2008, the FASB issued FSP FAS
No. 142-3,Determination of the Useful Life of Intangible Assets,
(FSP FAS
No. 142-3),
which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets. This pronouncement requires enhanced disclosures
concerning a companys treatment of costs incurred to renew
or extend the term of a recognized intangible asset. FSP FAS
No. 142-3
is effective for fiscal years beginning after December 15,
2008. The Company does not currently expect FSP FAS
No. 142-3
to have a material impact on its consolidated financial
statements.

3.

INVESTMENTS

A summary of the Companys available-for-sale securities as
of December 31, 2008 and 2007 is as follows:

December 31, 2008

Amortized

Gross Unrealized

Estimated

Cost

Gains

Losses

Fair Value

Cash reserve fund

$

10,824

$



$



$

10,824

December 31, 2007

Amortized

Gross Unrealized

Estimated

Cost

Gains

Losses

Fair Value

Cash reserve fund

$

49,851

$



$

(628

)

$

49,223

Auction rate securities

50,825





50,825

$

100,676

$



$

(628

)

$

100,048

In December 2007, the Company was advised that a cash reserve
fund, classified as available-for-sale investment would be
closed to new investments and immediate redemptions, and that
there had been a one percent decline in the net asset value of
the fund. During the year ended December 31, 2008,
$35.4 million was redeemed from this fund and the Company
recognized losses from redemptions of $0.9 million.

The Company has evaluated its investment in the cash reserve
fund to determine whether any unrealized losses represent an
other-than-temporary impairment. Based upon the Companys
assessments, the Company recorded a $2.7 million charge to
earnings during the year ended December 31, 2008 to
recognize unrealized losses on its investment in the cash
reserve fund as other-than-temporary impairment charges. The
Company has reduced the amortized cost for this investment by
the amount of the other-than-temporary impairment charges. The
new amortized cost basis will not be increased for subsequent
recoveries in fair value. Future increases or decreases in fair
value, if determined not to be other-than-temporary, will be
recorded in accumulated other comprehensive income or loss. If a
further decline in fair value occurs that is considered to be
other-than-temporary, the Company will record an additional loss
in the period when the subsequent impairment becomes apparent.
As of December 31, 2008, the Company has approximately
$10.8 million invested in this fund. During the year ended
December 31, 2008, there were $2.3 million of losses
included in earnings attributable to the unrealized losses
related to these securities held at December 31, 2008. The
fund currently has a projected schedule that will result in
approximately 90 to 95 percent of the fund being redeemed
in 2009.

As of December 31, 2008, the Company had long-term
investments with an original par value of $41.7 million and
an estimated fair value of $31.1 million that consist of
auction rate securities (ARS) whose underlying assets are
student loans, the majority of which are guaranteed by the
federal government. These ARS are intended to provide liquidity
via an auction process that resets the applicable interest rate
approximately every 30 days and allows investors to either
roll over their holdings or gain immediate liquidity by selling
such investments at par. The underlying maturities of these
investments range from 16 to 38 years. As a result of
current negative conditions in the global credit markets,
auctions for the $31.1 million investment in these
securities have failed to settle and may continue to fail to
settle on their respective settlement dates. Consequently, the
investments are not currently liquid and the Company will not be
able to access these funds until a future auction of these
investments is successful, issuers redeem the securities or a
buyer is found outside of the auction process. As a result, the
Company has classified these investments as non-current in its
December 31, 2008 consolidated balance sheets.

In November 2008, the Company accepted a settlement offer in the
form of a rights offering from the investment firm that brokered
the original purchases of the $41.7 million par value of
ARS, which will provide the Company with a right to sell these
securities at par value to the investment firm during a two year
period beginning June 30, 2010. Because the settlement
agreement is a legally enforceable firm commitment, the rights
are recognized as a financial asset at fair value in the
Companys consolidated balance sheet at December 31,
2008, and accounted for separately from the associated
securities as a long-term investment. The Company elected to
measure the rights at their fair value pursuant to
SFAS No. 159 and classify the associated ARS as
trading pursuant to SFAS No. 115. SFAS No. 115
requires changes in the fair value of trading securities to be
recorded in current period earnings, which the Company believes
will substantially offset changes in the fair value of the
rights, subject to the continued expected performance by the
investment firm of its obligations under the ARS rights
offering. As a result, the Company reclassified the ARS from
available-to-sale securities to trading securities in the fourth
quarter of 2008 and because the Company does not intend to hold
the associated ARS until recovery or maturity, the Company
recorded $9.0 million in losses in the fourth quarter of
2008 to record the decrease in the market value of the ARS. The
ARS rights of $9.4 million and related ARS of
$31.1 million are classified as long-term investments in
the consolidated balance sheets. The Company recorded
$10.6 million in charges to earnings during year ended
December 31, 2008 to recognize losses on these ARS
investments and a $9.4 million gain to earnings during the
year ended December 31, 2008 related to the ARS rights.

4.

FAIR
VALUE MEASUREMENTS

The Company adopted SFAS No. 157, Fair Value
Measurements (SFAS No. 157), on January 1,
2008. SFAS No. 157 applies to all assets and
liabilities that are being measured and reported on a fair value
basis. As provided by FSP
FAS 157-2,
the Company has only adopted the provisions of
SFAS No. 157 with respect to its financial assets and
liabilities. As defined in SFAS No. 157, fair value is
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date.

SFAS No. 157 also establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to
measure fair value. SFAS No. 157 requires that assets
and liabilities carried at fair value be classified and
disclosed in one of the following three categories:



Level 1. Observable inputs, such as quoted prices in active
markets;



Level 2. Inputs, other than the quoted prices in active
markets, that are observable either directly or
indirectly; and



Level 3. Unobservable inputs in which there is little or no
market data, which require the reporting entity to develop its
own assumptions.

The Company evaluates assets and liabilities subject to fair
value measurements on a recurring basis to determine the
appropriate level to classify them for each reporting period.
This determination requires significant judgments to be made.
The following table sets forth the Companys financial
assets and liabilities that were measured at fair value on a
recurring basis as of December 31, 2008, by level within
the fair value hierarchy (in thousands):

In June 2008, the Company established the NeuStar, Inc. Deferred
Compensation Plan (the Plan) to provide directors and certain
employees with the ability to defer a portion of their
compensation. The assets of the Plan are invested in marketable
securities that are held in a Rabbi Trust and reported at market
value in other assets (see Note 19).

(2)

Obligations to pay benefits under the Plan are included in other
long-term liabilities (see Note 19).

The following table provides a reconciliation of the beginning
and ending balances for the major class of assets measured at
fair value using significant unobservable inputs (Level 3)
(in thousands):

Cash Reserve

Auction Rate

ARS

Fund

Securities

Rights

Balance on January 1, 2008

$



$



$



Transfers in and/or (out) of Level 3

49,851

50,825



Total (losses) gains realized / unrealized included in earnings

(3,623

)

(10,635

)

9,416

Total unrealized losses included in other comprehensive loss







Purchases, sales, issuances and settlements, net

(35,404

)

(9,100

)



Balance on December 31, 2008

$

10,824

$

31,090

$

9,416

The fair value of the Level 3 cash reserve fund asset is
primarily determined using pricing models that utilize recent
trades for securities in active markets, dealer quotes for those
securities considered to be inactive, and assumptions
surrounding contractual terms, maturity and liquidity.

The valuation technique used to measure fair value for the
Level 3 auction rate securities asset is the average of the
values obtained using the discounted cash flow and market
comparables method. The discounted cash flow

As described in Note 3, the Company accepted a settlement
offer in the form of a rights offering from its investment firm
which will provide the Company with the right to sell the ARS at
par to the investment firm during a two year period beginning
June 30, 2010. Since the settlement is a legally
enforceable firm commitment, the rights are recognized as a
financial asset at its fair value of $9.4 million in the
Companys consolidated balance sheet as of
December 31, 2008, and are accounted for separately from
the associated ARS. Changes in the fair value of the rights are
recognized in current period earnings. The Company has elected
to measure the rights at fair value pursuant to
SFAS No. 159, and subsequent changes in fair value
will also be recognized in earnings. The valuation technique
used to measure fair value of the rights is the discounted cash
flow method, which involves judgment and assumptions surrounding
the timing of cash flows, fair value of the underlying ARS and
the ability of the investment firm to settle its obligation in
accordance with ARS rights offering.

For the year ended December 31, 2008, the Company recorded
$12.9 million of losses in interest and other expense and
$9.4 million of gains in interest and other income
attributable to the unrealized losses and gains related to
Level 3 assets held at December 31, 2008.

5.

ACQUISITIONS

NeuLevel,
Inc.

In March 2006, the Company acquired 10% of NeuLevel, Inc.
(NeuLevel), from Melbourne IT Limited for cash consideration of
$4.3 million, raising the Companys ownership interest
from 90% to 100%. The acquisition of the remaining 10% of
NeuLevel was accounted for as a purchase business combination in
accordance with SFAS No. 141, Business Combinations
(SFAS No. 141). The Company allocated the purchase price
principally to customer relationships ($4.1 million) based
on their estimated fair values on the acquisition date. Customer
relationships are included in intangible assets and are being
amortized on an accelerated basis over five years. In accordance
with SFAS No. 109, the Company recorded a deferred tax
liability of approximately $1.6 million with a
corresponding increase to goodwill. Goodwill is not deductible
for tax purposes.

UltraDNS
Corporation

On April 21, 2006, the Company acquired
UltraDNS Corporation for $61.8 million in cash and
acquisition costs of $0.8 million. The acquisition further
expanded the Companys domain name services and its
Internet protocol technologies. The acquisition was accounted
for as a purchase business combination in accordance with
SFAS No. 141. Of the total cash consideration,
approximately $6.1 million was distributed to an escrow
account for indemnification claims as set forth in the
acquisition agreement. Funds remaining in the account were
distributed to the former stockholders of UltraDNS in accordance
with the acquisition agreement following the first anniversary
of the acquisition.

Of the total purchase price, $8.5 million has been
allocated to net tangible assets acquired and $20.0 million
has been allocated to definite-lived intangible assets acquired.
The income approach, which includes an analysis of cash flows
and the risks associated with achieving such cash flows, was the
primary technique utilized in valuing the identifiable
intangible assets. The $20.0 million of definite-lived
intangible assets acquired consists of the value assigned to
UltraDNSs direct customer relationships of
$14.7 million, web customer relationships of
$0.3 million, acquired technology of $4.8 million, and
trade names of $0.2 million. The Company is amortizing the
value of the UltraDNS direct and web customer relationships in
proportion to the respective discounted cash flows over an
estimated useful life of 7 and 5 years, respectively. Both
acquired technology and trade names are being amortized on a
straight-line basis over 3 years.

As a result of the UltraDNS acquisition, the Company recorded
net deferred tax assets of $7.8 million in purchase
accounting. This balance is comprised primarily of
$15.8 million of deferred tax assets related to federal and
state net operating losses, capitalized research and
development, and certain amortization and depreciation expenses.
These deferred tax assets were offset by $8.0 million in
deferred tax liabilities resulting from the related intangibles
identified from the acquisition. Of the total purchase price,
approximately $33.9 million has been allocated to goodwill.
Goodwill is not deductible for tax purposes.

Followap
Inc.

On November 27, 2006, the Company acquired Followap Inc.
(Followap) for $139.0 million in cash and acquisition costs
of $1.8 million along with the assumption and payment of
certain Followap debt and other liabilities of
$5.6 million. Followap is a leading provider of
next-generation communications solutions for network operators,
delivering interoperability between operators and Internet
portals in five different functional areas, which are instant
messaging, presence, multimedia gateways, inter-carrier
messaging hubs, and services for handset clients. The
acquisition was accounted for as a purchase business combination
in accordance with SFAS No. 141 and the results of
operations of Followap have been included in the accompanying
consolidated statements of operations since the date of
acquisition.

Of the total cash consideration, approximately
$14.1 million was distributed to an escrow account, of
which $13.8 million will be used for indemnification claims
as set forth in the acquisition agreement. The other
$0.3 million will be used for the reimbursement of certain
costs and expenses of the representative for the former
stockholders of Followap. All funds remaining in the account
will be distributed to former Followap stockholders in
accordance with the agreement and plan of merger following the
resolution of any claims made pursuant to the agreement prior to
the first anniversary of the acquisition.

Under the purchase method of accounting, the total purchase
price is allocated to Followaps net tangible liabilities
assumed and intangible assets acquired based on their estimated
fair values as of November 27, 2006, the effective date of
the acquisition. The excess purchase price over the net tangible
and identifiable intangible liabilities was recorded as
goodwill. The purchase price was allocated as follows (in
thousands):

Cash and cash equivalents

$

2,218

Accounts receivable

1,161

Prepaid expenses and other current assets

283

Property and equipment

1,094

Other assets

870

Accounts payable

(707

)

Accrued expenses

(3,223

)

Deferred revenue

(212

)

Other liabilities

(1,019

)

Deferred tax liabilities, net

(646

)

Net tangible liabilities assumed

(181

)

Definite-lived intangible assets acquired

30,600

Goodwill

115,945

Total purchase price

$

146,364

Of the total purchase price, $0.2 million has been
allocated to net tangible liabilities assumed and
$30.6 million has been allocated to definite-lived
intangible assets acquired. The income approach, which includes
an analysis of cash flows and the risks associated with
achieving such cash flows, was the primary technique utilized in
valuing the identifiable intangible assets. The
$30.6 million of definite lived intangible assets acquired
consists of the value

assigned to Followaps customer relationships of
$20.8 million and acquired technology of $9.8 million.
The Company is amortizing the value of the Followap customer
relationships using an accelerated basis over five years and the
value of the acquired technology on a straight-line basis over
3 years.

As a result of the Followap acquisition, the Company recorded
net deferred tax liabilities of $0.6 million in purchase
accounting. This balance is comprised of $11.2 million of
deferred tax assets primarily related to federal and state net
operating losses. These deferred tax assets were offset by
$11.8 million in deferred tax liabilities resulting from
the related intangibles identified from the acquisition. Of the
total purchase price, approximately $115.9 million has been
allocated to goodwill and is reported in the Companys NGM
reporting unit. During 2008, the Company recorded impairment
charges to write down the carrying value of the NGM reporting
units goodwill and long-lived assets (see Note 7).
Goodwill is not deductible for tax purposes.

Pro
Forma Financial Information for acquisitions of UltraDNS and
Followap

The unaudited financial information in the table below
summarizes the combined results of operations of the Company,
UltraDNS and Followap on a pro forma basis, as though the
companies had been combined as of the beginning of each of the
periods presented. The pro forma financial information is
presented for information purposes only and is not indicative of
the results of operations that would have been achieved if the
acquisition had taken place at the beginning of each of the
periods presented. The pro forma financial information for all
periods presented also includes amortization expense from
acquired intangible assets, adjustments to interest income and
related tax effects.

Year Ended

December 31, 2006

(In thousands, except

per share data)

(unaudited)

Total revenue

$

344,236

Net income

$

57,201

Net income attributable to common stockholders per common share:

Basic

$

0.79

Diluted

$

0.73

I-View.com

On January 8, 2007, the Company acquired certain assets of
I-View.com, Inc. (d/b/a MetaInfo) for cash consideration of
$1.7 million. The acquisition of MetaInfo expanded the
Companys enterprise Domain Name Services (DNS) services.
The acquisition was accounted for as a purchase business
combination in accordance with SFAS No. 141 and the
results of operations of MetaInfo have been included within the
Clearinghouse Segment in the Companys consolidated
statements of operations since the date of acquisition. Of the
total purchase price, an estimate of $0.1 million was
allocated to net tangible liabilities assumed, $0.5 million
to definite-lived intangible assets and $1.3 million to
goodwill. Definite-lived intangible assets consist of customer
intangibles and acquired technology. The Company is amortizing
the value of the customer intangibles in proportion to the
discounted cash flows over an estimated useful life of
3 years. Acquired technology is being amortized on a
straight-line basis over 3 years.

Webmetrics,
Inc.

On January 10, 2008, the Company acquired Webmetrics, Inc.
(Webmetrics) for cash consideration of $12.5 million,
subject to certain purchase price adjustments and contingent
cash consideration of up to $6.0 million, and acquisition
costs of approximately $685,000. The acquisition of Webmetrics,
a provider of web and network performance testing, monitoring
and measurement services, expanded the Companys Internet
and infrastructure

services. The acquisition was accounted for as a purchase
business combination in accordance with SFAS No. 141
and the results of operations of Webmetrics have been included
within the Clearinghouse Segment in the Companys
consolidated statement of operations since the date of
acquisition. Of the total purchase price, an estimate of
$0.4 million has been allocated to net tangible assets
acquired, $6.4 million to definite-lived intangible assets
and $7.2 million to goodwill. Definite-lived intangible
assets consist of customer relationships and acquired
technology. The Company is amortizing the value of the customer
relationships in proportion to the discounted cash flows over an
estimated useful life of 3 years. Acquired technology is
being amortized on a straight-line basis over 5 years.

The Company has currently not identified any material
pre-acquisition contingencies where a liability is probable and
the amount of the liability can be reasonably estimated. If
information becomes available prior to the end of the purchase
price allocation period that indicates that such a liability is
probable and the amount can be reasonably estimated, such items
will be included in the purchase price allocation. In 2008, the
Company recorded a $1.2 million purchase price adjustment
to goodwill as a result of payment of earn-out consideration in
accordance with the purchase agreement.

6.

DEFERRED
FINANCING COSTS

During 2006 and 2008, the Company did not pay any loan
origination fees. In 2007, the Company paid $862,000 of loan
origination fees related to its new credit facility. Total
amortization expense was approximately $7,000, $158,000 and
$182,000 for the years ended December 31, 2006, 2007 and
2008, respectively, and is reported as interest expense in the
consolidated statements of operations. As of December 31,
2007 and 2008, the balance of unamortized deferred financing
fees was $704,000 and $522,000, respectively.

7.

GOODWILL
AND INTANGIBLE ASSETS

Goodwill

The Company tests its goodwill for impairment on an annual basis
on October 1st of each year. Testing is required
between annual tests if events occur or circumstances change
that would, more likely than not, reduce the fair value of the
reporting unit below its carrying value. For purposes of the
Companys impairment test in 2007 and 2008, the Company has
identified and assigned goodwill to two reporting units,
Clearinghouse and NGM. The Company operated in a single
reportable segment, Clearinghouse, for the year ended
December 31, 2006. The changes in the carrying amount of
goodwill by reportable segment during the years ended
December 31, 2006, 2007 and 2008 are as follows (in
thousands):

Clearinghouse

NGM

Total

Balance at December 31, 2006

$

86,190

$

119,665

$

205,855

Goodwill acquired

1,328



1,328

Purchase price adjustments

630

(3,720

)

(3,090

)

Impairment charges







Balance at December 31, 2007

88,148

115,945

204,093

Goodwill acquired

6,379



6,379

Purchase price adjustments

1,197



1,197

Impairment charges



(93,602

)

(93,602

)

Balance at December 31, 2008

$

95,724

$

22,343

$

118,067

In January 2007 and 2008, the Company recorded $1.3 million
and $6.4 million of goodwill related to its acquisitions of
MetaInfo and Webmetrics, respectively. During 2007, the Company
recorded purchase price adjustments related to its 2006
acquisitions of UltraDNS, NeuLevel and Followap. The adjustments
for UltraDNS

and NeuLevel increased goodwill by $0.6 million. The
adjustments for Followap reduced the amounts recorded to
goodwill by $3.7 million. In connection with its 2008
acquisition of Webmetrics, the Company recorded an increase of
goodwill of as a result of payment of $1.2 million earn-out
consideration in accordance with the purchase agreement.

In 2008, changes to the Companys key assumptions in
determining the fair value of its NGM reporting unit resulted in
two goodwill impairment charges for a total of
$93.6 million. Late in the first quarter of 2008, NGM
experienced certain changes in market conditions and
customer-related events that caused NGM to revise its business
forecast, triggering the Company to perform an interim goodwill
impairment test. First, the Company compared the estimated fair
value of the NGM reporting units net assets, including
assigned goodwill, to the book value of these net assets. The
estimated fair value for the reporting unit was calculated using
a combination of discounted cash flow projections, market values
for comparable businesses, and terms, prices and conditions
found in sales of comparable businesses. The Company determined
that the fair value of the reporting unit was less than its net
book value. As such, the Company then performed a theoretical
purchase price allocation to compare the carrying value of
NGMs assigned goodwill to its implied fair value and
recorded an impairment charge of $29.0 million in the first
quarter of 2008.

In the fourth quarter of 2008, in response to lower than
anticipated adoption rates and the resulting underperformance of
the NGM business, as well as the manner in which the mobile data
market had evolved and was evolving, the Company added new
leadership and conducted a strategic evaluation of the NGM
business. The goal of this strategic evaluation was to position
NGM for future long-term success in the mobile instant messaging
market. Associated with the Companys strategic
re-assessment and due to the underperformance in the NGM
business, certain key assumptions and estimates regarding the
NGM business had fundamentally changed, resulting in a new
business forecast for its NGM business which was used in
connection with the annual goodwill impairment test. First, the
Company compared the fair value of the NGMs reporting
units net assets, including assigned goodwill, to the book
value of these net assets. The estimated fair value for the
reporting unit was calculated using a combination of discounted
cash flow projections, market values for comparable businesses,
and terms, prices and conditions found in sales of comparable
businesses. The Company determined that the estimated fair value
of the reporting unit was less than its net book value as of the
annual impairment test date. As such, the Company then performed
a theoretical purchase price allocation to compare the carrying
value of NGMs assigned goodwill to its implied fair value
and recorded an impairment charge of $64.6 million in the
fourth quarter of 2008.

These goodwill impairment charges have been recorded in
Impairment of Goodwill in the consolidated statements of
operations.

Intangible
Assets

The Companys long-lived assets, excluding goodwill,
include: intangible assets, equipment, leasehold improvements
and furniture and fixtures. The Company tests long-lived assets
for impairment whenever events or changes in circumstances
indicate that the assets carrying amount is not
recoverable from its undiscounted cash flows.

During the fourth quarter of 2008, the Company made the
determination that its strategic decision to reposition the NGM
business and the resulting change in its projected results
served as an indicator of impairment for long-lived assets in
the NGM business reporting unit. In accordance with
SFAS No. 144, the Company performed an impairment
analysis of its NGM reporting units long-lived assets and
concluded that the carrying amount of the NGM asset group
exceeded the estimated future undiscounted cash flows of the NGM
asset group. The Company performed a recoverability test,
determined that the fair value of these long-lived assets was
less than the carrying value, and recorded a total impairment
charge of $18.2 million in the fourth quarter of 2008,
consisting of a charge of $12.9 million to write down the
carrying value of the NGM reporting units intangible
assets and a charge of $5.3 million to write down the
carrying value of the NGM reporting units property and
equipment (see Note 8). The NGM intangible assets
impairment charge of $12.9 million includes a
$10.9 million impairment charge related to

customer lists and relationships and a $2.0 million
impairment charge related to acquired technology. The valuation
techniques utilized by the Company in its fair value estimates
primarily included the discounted cash flow method and the
relief from royalty method.

There were no asset impairment charges recognized in the years
ended December 31, 2006 and 2007.

Intangible assets consist of the following (in thousands):

Weighted-

Average

Amortization

December 31,

Period

2007

2008

(in years)

Intangible assets:

Customer lists and relationships

$

43,740

$

36,659

5.6

Accumulated amortization

(15,463

)

(24,196

)

Customer lists and relationships, net

28,277

12,463

Acquired technology

17,068

17,744

3.3

Accumulated amortization

(8,581

)

(13,633

)

Acquired technology, net

8,487

4,111

Trade name

200

200

3.0

Accumulated amortization

(113

)

(180

)

Trade name, net

87

20

Intangible assets, net

$

36,851

$

16,594

Amortization expense related to intangible assets for the years
ended December 31, 2006, 2007 and 2008 of approximately
$6.2 million, $14.9 million and $13.9 million,
respectively, is included in depreciation and amortization
expense. Amortization expense related to intangible assets for
the years ended December 31, 2009, 2010, 2011, 2012 and
2013 is expected to be approximately $7.8 million,
$4.7 million, $2.4 million, $1.5 million and
$0.2 million, respectively.

The Company entered into capital lease obligations of
$5.6 million and $14.2 million for the years ended
December 31, 2007 and 2008, respectively, primarily for
computer hardware.

Depreciation and amortization expense related to property and
equipment for the years ended December 31, 2006, 2007 and
2008 was $17.8 million, $22.8 million and
$26.7 million, respectively.

In the fourth quarter of 2008, the Company recorded a
$5.3 million impairment charge to write down the carrying
value of property and equipment of its NGM reporting unit (see
Note 7).

9.

ACCRUED
EXPENSES

Accrued expenses consist of the following (in thousands):

December 31,

2007

2008

Accrued compensation

$

27,967

$

28,555

RRC reserve

3,624

3,295

Other

15,910

20,352

$

47,501

$

52,202

10.

NOTES PAYABLE

Notes payable consist of the following (in thousands):

December 31,

2007

2008

Promissory note payable to vendor; principal and interest
payable quarterly at 6.31% per annum with a maturity date of
April 1, 2008; secured by the equipment financed

$

35

$



Promissory note payable to vendor; principal and interest
payable quarterly at 5.58% per annum with a maturity date of
April 1, 2010; secured by the equipment financed

804

459

Promissory note payable to vendor; non-interest bearing,
principal payable quarterly with a maturity date of
April 1, 2010; secured by the equipment financed

6,868

3,905

7,707

4,364

Less: current portion

(2,501

)

(2,587

)

Notes payable, long-term

$

5,206

$

1,777

As of December 31, 2008, remaining principal payments under
promissory notes payable are as follows (in thousands):

2009

$

2,587

2010

1,777

Total

$

4,364

Revolving
Credit Facility

On February 6, 2007, the Company entered into a credit
agreement that provides for a revolving credit facility in an
aggregate principal amount of up to $100 million (Credit
Facility). Borrowings under the Credit Facility bear interest,
at the Companys option, at either a Eurodollar rate plus a
spread ranging from 0.625% to 1.25%, or at a

base rate plus a spread ranging from 0.0% to 0.25%, with such
spread in each case depending on the ratio of the Companys
consolidated senior funded indebtedness to consolidated EBITDA.
The Credit Facility expires on February 6, 2012. Borrowings
under the Credit Facility may be used for working capital,
capital expenditures, general corporate purposes and to finance
acquisitions. There were no borrowings outstanding under the
Credit Facility as of December 31, 2007 and 2008, but
available borrowings were reduced by outstanding letters of
credit of $10.1 million and $8.8 million, respectively.

The Credit Facility contains customary representations and
warranties, affirmative and negative covenants, and events of
default. The 2007 Credit Facility requires the Company to
maintain a minimum consolidated EBITDA to consolidated interest
charge ratio and a maximum consolidated senior funded
indebtedness to consolidated EBITDA ratio. If an event of
default occurs and is continuing, the Company may be required to
repay all amounts outstanding under the Credit Facility. Lenders
holding more than 50% of the loans and commitments under the
Credit Facility may elect to accelerate the maturity of amounts
due thereunder upon the occurrence and during the continuation
of an event of default. As of and for the years ended
December 31, 2007 and 2008, the Company was in compliance
with these covenants.